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This article appeared on The Globe and Mail on Thursday, January 22nd, 2015 and was written by Robert McLister.

It could be a boon for mortgage shoppers or 2015’s greatest mortgage disappointment.

I’m talking about the Bank of Canada’s 0.25 per cent rate cut Wednesday. At first blush, it was an unexpected bonus for mortgage borrowers. Prime rate was expected to drop as it usually does, in this case from 3.00 per cent to 2.75 per cent. That would have saved variable-rate mortgage holders 0.25 per cent, or roughly $500 per year on a $200,000 mortgage.

But now, all in mortgage-land are waiting and wondering if Canada’s major banks will actually pass along that rate cut. The Globe and Mail’s Streetwise reported Wednesday that TD Canada Trust may not reduce its prime rate. (TD sent me a statement this morning confirming that it is not changing prime rate “at this time.”)

More than nine times out of 10, banks do drop their prime rate in lockstep with Bank of Canada overnight rate cuts. But banks have also been known to hold back a cut for themselves. The last time that happened was December 2008. The Bank of Canada slashed rates 0.75 per cent. Yet, the major banks lowered prime rate by only 0.50 per cent.

We’re in a different world this time around. The average home price is 44 per cent higher than 2008, debt levels are at a record, bank revenue is pressured by multi-year lows in mortgage growth, competition has shrunk net interest margins and Ottawa had burdened banks with heaps of regulatory, capital and securitization restrictions. That makes banks and the federal government quite reluctant to see a lower prime rate.

The housing policy factor cannot be underestimated, not with the Bank of Canada admitting that certain regions’ home values may be up to 30 per cent overvalued. I spoke with one capital markets executive Thursday. He said, “I wouldn’t be surprised if the Bank of Canada called all the major banks and said, ‘Don’t use this rate cut as fuel to get more debt in consumers’ hands by lowering rates.”

Fortunately, despite TD’s reluctance to change prime (so far), if one of the major lenders does lower its prime rate, they likely all will. But if they do, there’s a very real chance the banks may also reduce variable-rate mortgage discounts. Instead of prime minus 0.65 per cent, for example, they may increase variable rates to prime minus 0.50 per cent or higher, in order to offset their lost margin. Playing their hands this way would attract less public criticism than overtly keeping the Bank of Canada’s cut for themselves.

If the banks don’t in fact pass along the Bank of Canada’s rate cut, the Big Five bank CEO’s may want to take shelter in their underground Bay Street bunkers — for there will be nuclear fallout from that decision.

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This article appeared on the CP24 (CTV News) on January 21st, 2015 and was written by Alexandra Posadzki, The Canadian Press.

TORONTO — Canadian homeowners have likely gained a reprieve from an expected increase in mortgage rates this year.

Economists were expecting rates to dip slightly in response to the Bank of Canada’s surprise move Wednesday to cut its trend-setting interest rate to 0.75 per cent, from one per cent, to soften the blow of dropping oil prices on the Canadian economy.

“This signals that low interest rates will be with us a while longer,” said Avery Shenfeld, the chief economist at CIBC World Markets, noting that the central bank’s rate cut will likely mean a corresponding 0.25 drop in variable, or floating, mortgage rates.

Fixed-rate mortgages are also likely to see a slight decline, as they follow bond yields, which will move lower in response to the rate cut.

However, TD Bank (TSX:TD) was quick to announce Wednesday it will maintain its prime interest rate at three per cent, noting that factors beyond the central bank influence its rates.

“Not only do we operate in a competitive environment, but our prime rate is influenced by the broader economic environment, and its impact on credit,” the bank said in a statement.

It was anticipated that the Bank of Canada would move to increase its overnight rate later this year due to an improving economy, until crude prices started to slide and dropped below US$50 a barrel.

Phil Soper, president of realtor Royal LePage, predicted Canadians could be shopping for cheaper mortgages within days.

“It doesn’t take long to react to a policy change like this,” Soper said. “That’s why it’s such a powerful tool.”

A conventional five-year mortgage stands at about 4.79 per cent, according to data from the Bank of Canada.

Decreased mortgage rates could boost sales and prices of homes in Central Canada, including in Toronto’s red-hot property market, where Soper said prices could climb by 4.5 to five per cent this year.

“It will be a lift to the industry overall,” Soper said. “However, it will be particularly pronounced in Central Canada, which we believe will see a lift from lower oil prices regardless and, when you add to it the stimulative impact of lower mortgage rates, we should see an uptick in activity.”

However, the rate cut may also spur Canadians, who have been criticized previously by the Bank of Canada for holding record levels of debt, to borrow more money.

“Certainly this isn’t going to discourage anyone from taking on debt,” Shenfeld said.

“But I think in the Bank of Canada’s eyes right now, it’s a lesser of two evils. They’ve shown discomfort with the amount of borrowing Canadians have done, but the economy right now can’t afford to shut the tap off on that if we’re not getting the lift to growth from the energy sector.”

Although cheaper mortgage rates are likely to buoy real estate markets in Central and Atlantic Canada, TD economist Craig Alexander says the impact of oil prices will trump interest rates in Western Canada.

“I think it’s inevitable that you’re going to see a pullback in sales and a softening in price growth in real estate in oil-rich provinces because, at the end of the day, income growth in those provinces is going to be a lot less,” Alexander said.

“It is an economic shock, and real estate markets do reflect local economic conditions.”

In its latest report, Royal LePage predicted home prices in Calgary would grow by 2.4 per cent this year – a slowdown from the 5.5 per cent jump they made last year.

Meanwhile, older Canadians who rely on interest-bearing investments for their income could find themselves squeezed as a result of the central bank’s policy change.

“It will push them into looking at alternative investments that can generate a bit more yield than a straight GIC,” Shenfeld said.

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This article appeared in the Financial Post on October 20th, 2014 and was written by Garry Marr. CMHC Continuing With Plans for Banks to Take on More Mortgage Risk

The head of Canada Mortgage and Housing Corp. said the Crown corporation is continuing with plans to have banks take on more risk when it comes to the housing market.

“In the insured market all of the risk is on CMHC’s balanced sheet or 90% on the government’s balanced sheet through private sector competitors. The government wants to reduce its exposure to the housing market,”  Evan Siddall, president of Canada Mortgage and Housing Corp. told the Canadian Club in Toronto in what was billed as a “conversation” with Terry Campbell, president of the Canadian Bankers Association.

Mr. Siddall said the government has asked CMHC to look at options and advise it on what to do next.

Consumers with less than a 20% downpayment must get mortgage default insurance if they are borrowing from a bank regulated by the Bank Act. The government backs loans insured by CMHC 100% and for up to 90% for private entities like Canada Guaranty.

Mr. Siddall has said there is some value to banks having some “skin in the game” which some have suggested could mean banks pay a deductible of up to 10% in the event a consumer defaults.

“It’s kind of classic perspective,” said the CMHC head. “It’s this idea of moral hazard that if you took risk away from the people who confronted it in the marketplace, it could lead to bad behaviour. The stupid example is if you insure someone who is driving a car, they won’t be a responsible car driver.”

Mr. Siddall said the banks are responsible but the idea of deductible is “good idea” and something along those lines is good economic policy.

Sources have told The Financial Post that CMHC has already been in discussions with the CBA and Office of the Superintendent of Financial Institutions about the idea which is years away from being implemented.

Mr. Campbell told the audience a lot of conversation with the industry will be needed before anything happens.

“In Canada, as you know and everybody in this audience knows, we did not have a housing crash like some other jurisdictions,” said Mr. Campbell, chalking that up to good risk management on behalf of banks when it comes it lending. “I think banks do have an awful lot of skin in the game if you look at the growth in their uninsured portfolio.”

This article appeared on CBC News on May 28th, 2014

Scotiabank offers 5-year fixed mortgage at 2.97%, CBC News. Scotiabank has lowered its five-year mortgage rate to 2.97 per cent, beginning a new sally in the war to win business.

The rate, effective until June 7, is the lowest among the big banks for a fixed five-year rate.

Two weeks ago Investors Group unveiled a three-year variable rate of 1.99 per cent. Variable rates often are lower than fixed rates, as the consumer takes the chance that interest rates will rise and cause higher payments.

In 2012, a number of Canadian banks offered five-year mortgage rates below three per cent — something that earned them a stern rebuke at the time from then Finance Minister Jim Flaherty. The banks quickly dropped the offer.

Flaherty tightened the country’s mortgage insurance rules in July 2012, in a bid to curb the rapid growth of consumer debt and soaring house prices. Although the measures briefly cut down on the number of people applying for mortgages, Canada’s housing market remains hot.

However, current Finance Minister Joe Oliver issued a statement today saying he will continue to monitor the market.

“It’s a small drop and its not my intention to be involved. We continue to monitor it,” he said in the lobby of the House of Commons.

Oliver pointed to government actions from 2008 to 2012 to reduce consumer indebtedness and the government’s exposure to the housing market through CMHC.

In March, Bank of Montreal again offered a fixed five-year rate of 2.99 per cent, but Scotiabank’s 2.97 per cent is a shade lower.

There is fierce competition among the banks for mortgage business, considered a secure form of consumer loan.

This summer, Royal Bank will offer real estate agents $1,000 for referring five first-time homebuyers.

First-time buyers are particularly desirable because they need a large sum of money and are likely to become bank clients for life.

John Andrew, a real estate expert with Queen’s University, said it was likely that other banks would follow Scotiabank’s lead to keep in pace in a competitive market — especially given a lag in sales in the all-important spring market which was delayed by bad winter weather.

“There’s no question that the mortgage lenders are very concerned about this slow spring and are obviously trying to catalyze the market and it’s obviously even more competitive right now than it normally would be,” Andrew said.

“We’re looking at mortgage rates very, very, close to this level being predominant right into the fall, and then I think we’re going to see bond yields begin to creep up again and we’ll start to see some rates rising.”

This article appeared on CBC News and was posted May 13, 2014 by Pete Evans. Investors Group unveils 3-year mortgage at 1.99%, CBC News.

Canada’s mortgage market was shaken up with a mortgage rate below two per cent on Tuesday as Investors Group unveiled a three-year variable rate mortgage at 1.99 per cent.

The Winnipeg-based financial services firm posted the rate on its website Tuesday, offering a 36-month term at a variable rate 101 basis points below IG’s current prime rate of three per cent.

“It’s probably something we may see more of,” Toronto mortgage broker Marcus Tzaferis said. “They offer it up so they can cross-sell their investment products.”

The offer comes with strings attached — namely that you can’t break the mortgage for any fee during the three-year term, unless you sell your home. But the offer does come with the ability to double up monthly payments, or pay a 15 per cent lump sum once a year.

In real dollar terms, it could knock a lot of money off a mortgage payment, at least over the short term. A standard 25-year $500,000 mortgage at a five-year rate of 2.99 per cent works out to $2,364 a month. That mortgage under IG’s new terms would be $2,115 a month — savings of $249 monthly, at least for the first three years, and as long as the variable rate doesn’t increase.

Tzaferis speculates the company is willing to take a loss on the home loan temporarily in the hopes of making money elsewhere down the line.

“They get the opportunity to wrap you up and cross-sell their mutual funds and you’ll probably renew and pay an extra half a per cent for a five-year then,” he said.

Investors Group’s five-year posted rate is currently at 3.4 per cent, slightly higher than what the market-leading big banks are offering.

Tzaferis says he recalls seeing five-year variable rate mortgages below two per cent several years ago, but it’s believed this is the first such posted product since the recession that began in late 2008. Kelvin Mangaroo, president of mortgage comparison website RateSupermarket.ca, says it’s the lowest rates he has seen in his company’s six-year history.

“I think they were trying to break the psychological barrier of two per cent to generate some interest … ahead of the peak spring buying season,” Mangaroo said.

“Rates will go up over time, but it looks like it won’t be any time soon,” he said.

In 2012, a number of Canadian banks offered five-year mortgage rates below three per cent — something that earned them a stern rebuke at the time from then-finance minister Jim Flaherty. The banks quickly dropped the offer.

In March, Bank of Montreal again offered a five-year rate of 2.99 per cent, a deal that Flaherty’s successor Joe Oliver was much more silent about.

Oliver released a statement Tuesday following news of the rate, noting the government has moved repeatedly in recent years to tighten lending rules and keep a lid on consumer debt and the housing market, but offering no hint it has any pressing intervention plans.

“I will continue to monitor the market closely,” the statement read.

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