The Incredible Shrinking Mortgage Rate

When the Bank of Montreal dropped its key mortgage rate below the 3% threshold in March, Paula Roberts started to get calls from her clients. They wanted to know if they should break their mortgages and refinance at BMO’s limited-time, bargain-basement 2.99% rate—the lowest rate ever officially offered by a Canadian bank for a five-year, fixed-rate mortgage. The sudden surge in interest baffled the Toronto mortgage broker. After all, these were clients who were already locked into mortgages with even lower rates and better terms than BMO’s. “All of our lenders were at lower than 2.99% at that point,” Roberts said.

It’s an open secret that Canadian homebuyers can secure mortgages on the cheap these days. BMO simply advertised the kind of lending practices that were already widespread. But stating the obvious got the bank plenty of attention—from media, from Canadian borrowers and from the federal government.
Finance Minister Jim Flaherty also picked up the phone, calling BMO to register his disapproval of the rate reduction. “My expectation is that banks will engage in prudent lending—not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.” He thanked the country’s other big banks for not following BMO’s lead. Manulife Bank apparently missed the subtext of that message, subsequently announcing a 2.89% mortgage offering. Flaherty blasted the promotion, calling it “unacceptable.”
After “consulting with the Department of Finance,” Manulife withdrew the offer the next day. BMO let its promotion expire at the end of March. Thus was restored the don’t-ask-don’t-tell practice of supplying discount mortgages without making too much of a fuss about it. “I bet if you went out today to any bank, if you have the right credit score and the down payment, you’d get a 2.89% mortgage,” says Peter Routledge, an analyst at National Bank Financial.
In reprimanding the financial sector, Flaherty again warned of risky household debt accumulation. But he also objected to the optics of the mortgage fire sale, adding: “It’s also symbolic.” In the midst of the effort to avert a housing crash and convince Canadians to stop borrowing, here were BMO and Manulife publicizing cut-rate housing debt with all the discretion of used-car salesmen. But you can hardly blame them. Fewer homes are being sold in Canada, reducing the demand for new mortgages. It’s simple economics: when demand falls, so do prices. To vie for the patronage of the dwindling ranks of borrowers, banks have to sweeten the terms of their mortgages.
Banks can afford to slash rates because money has never been cheaper in Canada. While the federal government appeals for restraint in debt accumulation, the Bank of Canada’s interest rate policy encourages just the opposite. And since policy rates aren’t likely to budge for at least another year, Flaherty is left to glower at banks from up on high while mortgage rates continue to drop. Just how low they go will be limited only by the banks’ profit margins and the government’s persuasiveness in discouraging loose borrowing and lending. “I really can’t see them going any lower. But I said that before,” Roberts says. “Who would have thought they would have gone this low?” There’s never been a better time to get a mortgage than right now. But there soon could be.

Having saved up enough money for a down payment while living with his parents in Toronto, Lucas Shearer decided to make his first foray into the real estate market in January. He quickly found the right place—a $344,000 condo in the Yonge and Eglinton neighbourhood—after qualifying for a 2.89% five-year fixed-rate mortgage. “At a higher rate, it definitely would not be as attractive,” he says. “I probably would have just stayed at home, saved more money and assessed it in a year from now.” Compared to the average discounted rate on five-year mortgages over the past five years, which according to ratehub.ca is about 4.25%, Shearer will have saved about $18,000 in interest and owe $6,000 less by the time his mortgage expires. Compared to the 6% peak five-year rate over the past five years, Shearer will save more than $50,000.
While Shearer wasn’t compelled to buy real estate by low mortgage rates alone, they were an added incentive that made the market more attractive to him. This runs counter to the government’s deliberate attempt to contain housing activity. Bank of Canada governor Mark Carney warned of a “brutal reckoning” when rates eventually climb and expose the finances of many households as unsustainable. There are those homeowners who can afford a $700,000 home today, but could only afford a $500,000 home at 6.5%, which is where rates could conceivably sit in five years when new mortgages expire, says John Andrew, a real estate professor at Queen’s University.

Four times in the past four years, Flaherty has tightened mortgage insurance rules, each time making it a little more difficult to get home financing. And although household debt continues to hit new record highs—reaching 165% of disposable income by the end of last year—Flaherty has succeeded in slowing housing activity in Canada. But that comes at the expense of the mortgage market, which is the largest of the banks’ lending businesses. Mortgages in the banking sector are currently growing at about 6% a year—half of the pre-recession rate of growth. “The competition between institutions is so fierce that they really have no choice but to compete by offering as low a rate as they possibly can,” Andrew says.

Lenders still make money on low-rate mortgages. Their profit margins are roughly measured by the difference between mortgage rates and the banks’ own costs of borrowing, which is approximated by the Bank of Canada’s five-year benchmark bond rate—about 1.2%. Most of the money the banking sector lends out is provided by retail deposits, supplemented by borrowing on the “wholesale” market. The minimum spread at which a bank would be willing to offer five-year mortgages is about 140 basis points, says Ohad Lederer, a financial services analyst at Veritas Investment Research. That would put a floor on five-year mortgage rates of about 2.6%—assuming the five-year bond rate doesn’t fall any further. Variable or shorter-term mortgages are already available for even less. So yes, there’s still room for rates to fall, and banks may prove willing to sacrifice profitability for market share. “You’re talking about a long-term customer. The vast majority of mortgage borrowers are on a 25-year amortization period, and if they’re with a major lender, they will probably never leave,” Andrew says. “It also opens up other opportunities. Once you’ve got a relationship with a lender, maybe you’re more likely to get a savings account, get a line of credit, or take another mortgage out.”
To Flaherty, the competitive strains of the market do not justify a mortgage rate war in the banking sector. But it’s unusual for a finance minister to publicly scold a financial institution like Manulife for a pricing decision. “The whole thing is puzzling,” Andrew says. “It’s like phoning up Galen Weston and saying I don’t like the price of milk.”
Criticism came from many quarters, including the Conservative party’s own ranks. “Me, personally, I would not dictate to businesses what prices to decide,” Small Business Minister Maxime Bernier said. “It’s the market. It’s supply and demand that decides the prices. It is the case for interest rates; it is the case for other products too.”
The Canadian mortgage market, however, is not exactly free and open. The Canada Mortgage and Housing Corp. insures roughly half of outstanding mortgages in Canada against default. Genworth Canada, backed by a federal guarantee, covers another 25%. So for the great majority of the Canadian mortgage market, the risk of default is shouldered not by the banks, but by taxpayers. “For the banks, it’s fantastic,” Andrew says. “They get their money and they don’t have any of the hassle of the foreclosure process. It’s pretty much an ironclad guarantee.”
Whereas default risk is a natural disincentive to loose lending, from the banks’ perspective, the risk of issuing mortgages is minimal, which helps to explain why they’re willing to loan money at such low margins. It also helps to explain why the government wants to have a say in how mortgages are priced. “The more people take on debt, the bigger the contingent liability the government has, the riskier it gets,” Routledge says.
Of course, the government can always tighten regulations to effectively limit the availability of mortgages. While he has no control over mortgage rates, Flaherty does have the power to further reduce the maximum amortization or increase the minimum down payment on insured mortgages. But there are competing concerns emerging about the Canadian economy, aside from housing, and Flaherty has given no indication he intends to resort to further regulation. Mortgage tightening effectively pushes marginal borrowers out of the market, reducing the size of the pool of first-time homebuyers. And it’s that cohort driving much of the demand for condos and suburban starter homes, Andrew says. The government can’t afford to unduly impair the construction sector. Rather, it wants to slowly let some air out of the housing bubble without triggering anything severe.
Given all of that, the big question is whether rates will sag even lower in the months and years to come. It could indeed happen if the Bank of Canada keeps the overnight rate where it is right now, while a slowing housing market puts even more pressure on the banks to cut their profits as they battle for share in a dwindling market.
As for the first condition, outgoing governor Mark Carney announced on April 17 that the Bank of Canada was yet again keeping its overnight rate at 1% and said the bank was pushing back its own projections for the economy’s recovery to “full capacity” to mid-2015. “This is later than was anticipated by the Bank in January,” Carney said. In other words, the target interest rate looks likely to remain at its current rock bottom through 2014—and perhaps even longer.
The second condition for declining rates will likely be satisfied too: housing unit sales have now been declining for months, unemployment has remained stubbornly high, and economic growth is still sluggish. All these factors further constrict the number of mortgage-worthy homebuyers; as banks scramble to court them, cutting into their profit margins looks ever more likely. That could conceivably take variable rates as low as 2.2%—perhaps even lower.
For the moment, Manulife and BMO have fallen back in line by reducing the visibility of their mortgage rates. But nothing has changed in terms of the mortgage contracts being signed. Roberts, the Toronto mortgage broker, is advising all of her existing clients that if they are currently locked in mortgages at rates of 3.59% or higher, they need to consider breaking their contracts and refinancing, depending on the penalties and time to maturity. The lure of a bargain is hard to resist, and it looks like more bargains are on the way—just don’t tell the finance minister.

Pensioners, be warned: Tenants offering to do work in lieu of decreased rent may not be as handy and helpful as you think.

Just ask the Alberta woman who has seen her investment property taken over by a tenant, identifying himself as a Freeman-on-the-Land, members of a group of so-called sovereign citizens.
Rebekah Caverhill rented half of her duplex in Calgary’s upmarket Parkdale neighbourhood in November 2011 on the recommendation of a friend.  In return for three months reduced rent, the self-described handyman agreed to spruce up the property.
Instead, upon inspection, Caverhill discovered that he completed destroyed the interior of the unit and changed the locks.
Having ignored eviction notices, the case will most likely end up in the civil courts. Now real estate lawyers and agents fear that naïve landlords, and especially pensioners, are being targeted by rogue tenants.
Mark Weisleder, a Toronto-based lawyer, says that all tenants have to be relentless and do whatever it takes to evict such rogue tenants.
Speaking to CREW, Weisleder offers five tips to avoid renting your unit to rogue tenants.
•    Advertise that you will be doing background and credit checks
•    Check out the tenant on social media; for example, if this woman’s tenant was checked out on LinkedIn,  you would see that he claimed to be the senior chief justice at Tacit Supreme law court
•    Regularly inspect the property
•    Interview the tenant where they currently live and see how they treat someone else’s property
•    If you suspect trouble, do not wait; get an experienced paralegal to assist you right away

Affordability Options For First-Time Buyers

First-time home buyers who want affordable homes may want to take a hard look at fixer-uppers, smaller homes and cheaper commutes to work to save on the costs of buying and owning a home.

Real estate brokers say many home buyers expect more than they can afford in a home and once they start pounding the pavement for housing their disconnect could be discouraging.

In an online survey of 150 of its brokers, Coldwell Banker discovered some disturbing trends among first-time home buyers.

While nearly half of the Coldwell Banker brokers surveyed said affordability was the No. 1 concern for first time buyers, 81 percent of those buyers also consider move-in conditions to be very important when searching for homes. Only 7 percent are considering fixer-upper homes.

The real estate company suggests more buyers should examine the fixer-upper option -- among others -- to get the affordability they seek.

"In the past, first-time home buyers were willing to purchase older, more basic houses in an effort to save money and break into homeownership," said Jim Gillespie, president and chief executive officer, Coldwell Banker Real Estate, LLC.

"It is important for first-time homebuyers to remember that by considering a fixer-upper for their first home purchase, they can build equity over time and later move up and into their second-stage home that better reflects their expectations," he added.

Buyers looking for affordability who go with the fixer-upper option should get the home professionally inspected to determine what fixing up is necessary, and certainly not bite off more than they can chew. Even homes that need a basic face lift -- paint, carpeting, landscaping, window treatments and other cosmetic touches -- can come with big savings. Homes that may require professional upgrades cost even less, but the buyer has to weigh the discounted price against the cost of the improvement.

Coldwell's study also found some disconnect between affordability desires and what buyers want in home size and its location.

The vast majority of first-time buyers, 71 percent, were looking for larger homes than they were 10 years ago, brokers reported, but bigger isn't better when it comes to price. A smaller single-family home or a condo or townhome can be cheaper by virtue of the smaller footprint and square footage. The smaller cost on a smaller home also could come with affordability

Forty-one percent of brokers also said, for their buyers, proximity to their workplace was numero uno when it came to considerations made when looking for a home. Higher gasoline prices have made the job center location factor even more crucial, however, in most metros, a home's proximity to employment centers comes with an added cost. Homes nearer job centers cost more because of the added value of reduced transportation costs and time (which is money) spent commuting.

However, buyers can enjoy the best of both worlds if they purchase a cheaper home away from job centers, but in a transit oriented development (TOD) or other distant community that offers low-cost public transit to work. Carpooling, trip sharing and car sharing communities boost the idea of affordable housing.

Coldwell Banker also said 46 percent of the survey respondents reported that first-time home buyers look at five to 10 homes, on average, before making a purchase.

The message is simple here. Spend more time looking at more homes for sale. Instead of five to 10, make it 10 to 20. Take the time to find affordability. Discounts were more likely available from homes that had been on the market for 90 days or more; homes for sale that were owned by long-time owners; homes for sale from flipping investors down on their luck; and properties owned by we-want-to-sell-real-estate banks who now know what it means to be careful what you wish for.

While nearly half of the Coldwell Banker brokers surveyed said affordability was the No. 1 concern for first time buyers, 81 percent of those buyers also consider move-in conditions to be very important when searching for homes. Only 7 percent are considering fixer-upper homes.

However, buyers can enjoy the best of both worlds if they purchase a cheaper home away from job centers, but in a transit oriented development (TOD) or other distant community that offers low-cost public transit to work. Carpooling, trip sharing and car sharing communities boost the idea of affordable housing.

Coldwell Banker also said 46 percent of the survey respondents reported that first-time home buyers look at five to 10 homes, on average, before making a purchase.

The message is simple here. Spend more time looking at more homes for sale. Instead of five to 10, make it 10 to 20. Take the time to find affordability. Discounts were more likely available from homes that had been on the market for 90 days or more; homes for sale that were owned by long-time owners; homes for sale from flipping investors down on their luck; and properties owned by we-want-to-sell-real-estate banks who now know what it means to be careful what you wish for.

The real estate company suggests more buyers should examine the fixer-upper option -- among others -- to get the affordability they seek.

"In the past, first-time home buyers were willing to purchase older, more basic houses in an effort to save money and break into homeownership," said Jim Gillespie, president and chief executive officer, Coldwell Banker Real Estate, LLC.

"It is important for first-time homebuyers to remember that by considering a fixer-upper for their first home purchase, they can build equity over time and later move up and into their second-stage home that better reflects their expectations," he added.

Buyers looking for affordability who go with the fixer-upper option should get the home professionally inspected to determine what fixing up is necessary, and certainly not bite off more than they can chew. Even homes that need a basic face lift -- paint, carpeting, landscaping, window treatments and other cosmetic touches -- can come with big savings. Homes that may require professional upgrades cost even less, but the buyer has to weigh the discounted price against the cost of the improvement.

Coldwell's study also found some disconnect between affordability desires and what buyers want in home size and its location.

The vast majority of first-time buyers, 71 percent, were looking for larger homes than they were 10 years ago, brokers reported, but bigger isn't better when it comes to price. A smaller single-family home or a condo or townhome can be cheaper by virtue of the smaller footprint and square footage. The smaller cost on a smaller home also could come with affordability

Forty-one percent of brokers also said, for their buyers, proximity to their workplace was numero uno when it came to considerations made when looking for a home. Higher gasoline prices have made the job center location factor even more crucial, however, in most metros, a home's proximity to employment centers comes with an added cost. Homes nearer job centers cost more because of the added value of reduced transportation costs and time (which is money) spent commuting.

Should you sell your house before you buy a new one?

It’s the first choice you have to make when you decide to move and one that just might define the state of the housing market.
Do you start the process by selling or buying? Buy something and the clock starts ticking on selling your current home because you likely need that money to close the house you just purchased. In markets where sales are plummeting that could be a scary proposition. So you sell first. But what do you do if you can’t find something you like in the neighbourhood you want. Remember, your kids need to go to that local school and be in the district. Are you prepared to rent for awhile?
People in the industry say the tradition historically has been to sell your home and then start shopping for the new one. But in this housing market, with multiple offers the norm and time on the market dropping in many cities, the process reversed and people starting buying, knowing their home would sell with ease.
Could the tide be turning in another sign of a slowdown for housing?
There are drawbacks to both selling first or buying first but the decision is very much based on your view of the market.
Contractor Paul Donadio, own of Terracon Inc., is facing that decision and the 37-year-old married Toronto homeowner has some trepidation about the market in Canada’s largest city.
“I’m going to sell my house first,” says Mr. Donadio. “What if I don’t hit my numbers? I could be stuck with two houses and how do you pay for it all?”

One option is to demand a closing date on your purchase a little further out, increasing your odds of selling. At the end of the day, you might need an escape clause and Mr. Donadio has one in his income property he’s prepared to move into should he have trouble buying. Renting is an option, but that market can be tight too.
“You have to live somewhere,” says Mr. Donadio. “You don’t want to end up buying the wrong house. I want to buy a house that I can fix up. Selling is more stressful than buying.”

His real estate agent David Batori says he’s telling his clients to sell first because he believes more listings will come to market in the spring. But he points out that, for a young family, selling first comes with the risk of not finding something in the right neighborhood.
“If you are too picky, you’re in trouble,” said Mr. Batori, who adds if you can carry two properties you should buy the home that is perfect for you with that long closing date.
You are going to need a lot of capital to pull that off because bridge financing at the banks is difficult to obtain without a buyer commitment for your existing home. The banks will provide bridge financing about two percentage points above prime if the closing date for the sale of your home comes after your purchase date, but you have to have a committed buyer.
Ultimately, if you buy first you can reduce the price of the home you are selling to move it.
Forget about trying to walk away from your purchase though, you’ve made a commitment to buy and left a deposit. “You can’t just walk away, you’ll be sued, you are in breach of contract,” says Mr. Batori, adding he has only seen someone try to walk away because of a death.
You can try to buy a home with a condition that says the purchase is subject to the sale of your existing home but you are going up against people with no conditions.
“Sellers will laugh at you, “ says Mr. Batori, adding before anybody agrees to that type of offer they’ll have an escape clause in case a firm bid comes in. That clause might give you a right of first refusal but you’ll have to come back with a clean offer with no conditions.
Farhaneh Haque, director of mortgage advice and real estate-secured lending at Toronto-Dominion Bank, cautions against buying without having a firm seller for your existing home.
“You can have the equity for two properties but you also need to have the income to carry both properties,” said Ms. Haque, adding the bank probably won’t extend credit to you for two homes without a high enough income. “It would put you in a situation that is uncomfortable and maybe not even affordable. Do you want to sell a property because you are desperate?”
Doug Porter, chief economist at BMO Capital Markets, said any shift in the trend to buy or sell first will depend on the city because some cities are still sellers’ markets.
“In a sellers’ market you can [buy first],” said Mr. Porter. “In most major cities, we are shifting. Personally, I would sell first.”
Ultimately, it comes down to your view of the market. You want to buy first, you have to be pretty confident you can sell. Are you?