Forecasts from the Big 5 Banks Continue to Point to Easing of Interest Rates

The Bank of Canada cut its overnight rates on April 22 to 3%. As a consequence, lenders/banks brought down their prime rate to 4.75%. The question in everyone’s mind is - Have we hit the bottom?

Here’s what economists at the Big 5 Banks are forecasting:

1. TD Canada Trust - “more easing to come” (see TD Economics Weekly Bottom Line dated April 25, 2008)
2. RBC - Overnight rate to drop to 2.75% (see RBC’s Financial Markets Monthly for April 2008)
3. CIBC Wood Gundy - 0.25% rate cut to 2.75% (see CIBC World Markets Market Call for April 24, 2008)
4. BMO - Rates to 2.75% by September 2008 (see BMO’s Rates Scenario dated April 1, 2008)
5. Scotia Capital - Rates to 2.75% by 2nd Quarter 2008 (see Scotia Bank’s Forecast Update dated March 28, 2008)

With rates expected to decline significantly in the short term, you need to sit down with your mortgage broker to design the right strategy to take advantage of lower rates. One option is to switch to a variable rate mortgage. If you are currently locked-in on a fixed rate mortgage, it may be worthwhile to switch and absorb the prepayment penalty (if any). Your mortgage broker should be able to advise you on how to properly time your transaction so you obtain the maximum benefit.

CMHC’s Vancouver Housing Market Update

On April 10, 2008, Robyn Adamache, CMHC’s Senior Market Analyst, presented to a group of bankers and mortgage brokers in the Richmond and Vancouver area CMHC’s Housing Market Update. She discussed recent housing trends and provided an update on the local resale market

One notable trend is the greater acceptability of apartment living. This can be attributed affordability, land constraints, demographics, social, environmental and aesthetic issues.

Approximately 8% of Vancouverites are looking to buy a home. Thirty-five percent will be first time home buyers while 64% will be repeat buyers.

Despite a recent increase in listings to 5 months, the resale market is still in “sellers market” territory. Housing prices will continue on the uptrend. CMHC forecasts housing price increases of 8% for both Richmond and Vancouver. House prices in Surrey/White Rock will grow by 6%. In Delta, the price increase is expected to be 5%. . Overall, for 2008, house prices in Metro Vancouver are expected to increase by 8% in 2008 and 5% in 2009.  Although there was a dip in sales for the First Quarter of 2008, first quarter results are not a good predictor of sales for the full year

You may download Ms. Adamache’s presentation by clicking on this link.

How to Qualify for the Largest Mortgage Amount

With the high cost of property in the Metro Vancouver area, how does one qualify for the largest possible mortgage amount? Here are a few tips:

1. Have a good credit score - Having good credit has its privileges. Mortgage insurer guidelines now allow borrowers to spend up to 44% of their gross income on debt payments (including the mortgage on your new home). Not all lenders are implementing this guideline so you do need to shop around to find a lender that will finance you to this limit.
2. Take an extended amortization - An couple with a combined income of $60,000 can increase their mortgage qualification from $330K to $400K by increasing their amortization from 25 years to 40 years.
3. Minimize your other debt payment - Any payments you make to other creditors (auto loan payments, credit card payments, etc.) will reduce the amount you are allowed to borrow. You have two options: (a) You can fully pay these debts; or (b) apply to reduce the payments (possibly by getting a consolidation loan from your bank).
4. Consider purchasing a property with a rental suite - A portion of the rental income can be treated as a reduction to your mortgage payments resulting in a significant boost to the amount you qualify for.
5. Use a mortgage broker - Credit policies differ among lenders. Consequently, the amount you will get pre-approved for will depend on the lender you go to. This is why you need a mortgage broker. We know which lenders are providing the most favorable terms so you can get the mortgage amount that is right for you.

With these new guidelines, many of the first time home buyers that come through our doors are pleasantly surprised by the amount they qualify for. In many cases, they have been to their bank and they have been told that they qualify for much less. Of course, we don’t suggest that you buy a property that will stretch you financially. We believe that our job is to let you know how much you will be approved for. It is your decision as to whether you think you should go to the limit.

Variable Rate Mortgage Holders Usually Come Out Ahead of Fixed Rate Mortgage Holders

Based on research done by Moshe Milevsky, associated professor of finance at the Schulich School of Business at York University, holders of variable rate mortgages came out ahead of fixed rate holders 90.1% of the time. The study was based on mortgages granted between 1965 and 2007. The resulting savings from the variable rate mortgages allowed borrowers to pay off their mortgage between 8 and 19 months sooner.

While it may be true that the odds favor variable rate holders, 70% of Canadian still opt for a fixed rate mortgage. To many, there is nothing like the certainty of knowing exactly how much you need to pay each month.

To learn more, click here to read the April 2, 2008 article of the Vancouver Sun.

The Top 5 Credit Misconceptions

(From Transunion’s September 2007 newsletter)

#5: Closing old accounts will improve your credit score
#4: Co-signing a loan doesn’t make you responsible for the account
#3: Paying off a negative record will get it removed from your credit report
#2: Paying off a debt will make your credit score jump up 50 points right away
#1: Checking your credit reports will lower your credit score

Pre-Approvals: What You Need to Know

When searching for a home, it makes sense to get a mortgage pre-approval and line up the necessary documents prior to house hunting.What is a pre-approval? Its the process of determining how much money a prospective homebuyer will be eligible to borrow prior to a formal application for a mortgage loan, based on information they have provided.

With a pre-approval, you’ll get a good sense of how much you can afford, and you’ll be assured of a particular mortgage rate for a set period of time. With a locked-in rate, there is no risk of interest rate increases while you are house hunting. A mortgage broker may be able to obtain a longer pre-approval rate hold. Another benefit of a pre-approval is that you’ll be in a much better position to negotiate with sellers.

On the other hand, a pre-approval is not a rock-solid guarantee of financing, does not eliminate the need to make a conditional offer, and you still must consider all closing costs.

I always recommend that you get a pre-approval in person. While it is possible to get pre-approval over the phone or internet, you will get the most value by meeting your mortgage broker one-on-one. This will allow you to ask questions, run scenarios and learn all your options different options. Remember, the amount you are qualified to purchase is not just ONE number. It is a range of amounts based on several factors such as your income, the lender, the interest rate, the down payment, your credit, the type of property, etc. When you are meeting your mortgage broker, he/she should be able to run through the various amounts you will be qualified to purchase.

Learn more about the pre-approval process at BCMortgage.ca by visiting our website.

The Cost of a Cashback Mortgage?

I often get asked whether a cashback mortgage is a good option for borrowers. While a cashback may seem attractive, be aware that unlike other cashback products, mortgage cashbacks are not free. Lenders will increase the interest rate to cover the cost of the cashback.

One cashback product to consider is TD Canada Trust’s 7 yr, 7% cashback product. This product is offered by Invis (www.BCmortgage.ca). The current interest rate on this mortgage is 7.7%. You may think that this is a high rate of interest but this is because you get 7% of the mortgage amount interest-free. Yes, it is still more expensive than a traditional mortgage. For example, on a $300,000 mortgage (where you get a cashback of $21,000 or 7% of $300,000), you would pay interest over a 7 year period of $156,608. If you took a standard (i.e., no cashback) mortgage, and paid the current 6.2% interest on a 7 year mortgage, you’d pay total interest of $125,555. That’s a difference of $31,053. We still have to deduct the cashback of $21,000 to arrive at the net cost of $10,053 (or $31,053 less $21,000).

In essence, you’ve spent approx. $10K to get a $21K cashback. Is this worth it? For most people, the answer is no. However, if you are cash strapped or would like to purchase furniture or need money for legal costs, this could be a solution for you.

Besides the added cost of a cashback, borrowers have to be aware that cashbacks are only available for fixed mortgage terms. There are no variable rate mortgages that offer a cashback. This is a major disadvantage since this precludes you from enjoying the lower interest rate of a variable rate mortgage. Secondly, if you were to break your mortgage, you would have to return a pro-rata share of the cashback. For example, if you were to break your mortgage on the 5th year of a 7 year cash back mortgage, you will have to return 2/7th of the cashback you received when you took out the loan.

There are many lenders offering cashbacks. Since most consumers will not have the software to analyze each offering, we suggest you consult a mortgage broker at Invis (BCMortgage.ca) to help you decide which cashback offering is the best one to take.

Mortgage Strategies to Control Your Consumer Debt

Consumer debt can come from many sources, such as credit cards, department store cards, car loans or other personal loans – with many Canadians paying much more in interest costs than they need to be.

Increasing equity in homes can offer a possible solution for homeowners burdened by high-interest consumer debt. While personal debt levels continue to rise, so too does the equity that many have in their homes, which opens a range of options to dramatically reduce one’s interest cost burden. Here are two common strategies for homeowners:

Home Equity Line of Credit

Another mortgage option for homeowners which offers greater flexibility is a Home Equity Line of Credit – or HELOC – which allows you withdraw funds as needed.

The advantage here is that you can put a HELOC in place and charge up when needed, then pay down the line of credit, never needing to re-qualify, provided payments are kept up-to-date.

Your payments fluctuate depending on current interest rates and the outstanding balance over the month, with interest-only payment options available. A HELOC can be convenient for paying off higher interest debts, as you withdraw and pay (relatively lower) interest on only what you need.

Mortgage Refinancing

Refinancing a mortgage can give you the opportunity to consolidate higher-cost borrowing with lower-cost mortgage financing – potentially allowing you to save significantly on overall borrowing costs.

With a lower interest rate on a refinanced mortgage, some borrowers decide on a lower monthly payment to improve their cash flow, while others choose to pay off the loan sooner, saving them money over the long term. What’s more, mortgage refinancing offers a plan to reduce your debt – after the elapsed amortization period, your balance is zero.

With Canadians now carrying increasing amounts of high-interest debt such as credit card balances and personal loans, how best to manage one’s borrowing costs is a concern for many. Talk to your Invis Mortgage Consultant – you may be surprised to learn how much you can save with the right debt management strategy.

Mortgage Solutions for Seniors: Reverse Mortgage vs. HELOC

What are the financing options for seniors?  It depends on the situation.   For those who still have income (pension income included), it may be possible to obtain a home equity line of credit (HELOC), irregardless of age.  With a HELOC, you can draw on the mortgage until you reach the limit approved by the financial institution.   If you are using this strategy to fund your living expenses, your final objective must be to sell and downsize within a few years.  Eventually, you will hit the limit of your HELOC and you will have no more funds to draw on for living expenses.  At this time, you will need to sell your home if you cannot afford to pay the interest on the HELOC.

If you don’t plan (or want) to sell and/or your income is not sufficient to qualify for a mortgage, you need to consider a reverse mortgage.   With a reverse mortgage, it is possible to obtain up to 50% of the value of the property.  The loan does not have to be repaid unless you sell the home.  The amount that is loaned does not depend on your income or credit rating.  It depends on the your age,  the type of property (e.g., single detached, townhouse, condo) and location of the home.  Of the three criteria, your age is the probably the most important factor.  For example, a person who is 60 years old can expect to be approved for a maximum of 15% of the home value while someone in their seventies may get 30% of the value of the home.

You should consider a reverse mortgage if:

1. You plan to stay in that home for a long time
2. You cannot qualify for a tradtional mortgage or HELOC
3. You don’t want to repay the debt

The downside to a reverse mortgage is the interest rate.  The interest rate starts at 8%.   You may also expect to pay a set up fee of approx. $2000 (legal and appraisal fees).  While the interest rate may be on the high side, you may be able to offset some of the costs by investing the proceeds of the mortgage and generating some tax deductible interest expenses.  A good financial planner can explain this strategy to you.

Lastly, you should also explore the option of downsizing.  Be aware that there are significant costs to downsizing such as realtor fees, transfer tax, moving costs to consider.

Where are house prices in Vancouver / BC headed in 2008?

You may find this hard to believe but I’m hearing that we can still expect house prices to increase in 2008. I was at the Mortgage Broker’s Association of BC Trade show this week and attended the presentation of two well respected economists - Cameron Muir of the BC Real Estate Association and Benjamin Tal of CIBC World Markets. Mr. Muir expects house prices to continue rising, albeit at a slower growth rate of between 7-8%, not the 20% growth rate we are accustomed to seeing during the past few years.

Unlike our friends in Ontario and Quebec, British Columbia is less impacted by the slow down in the US economy. For us, the biggest impact will be in the softwood lumber industry, which is reeling from the high Canadian dollar and from lower US housing starts. Thankfully, the forest industry now accounts for only 3% of our economy. Commodity and energy prices are at its peak and the pulp and paper industry is holding its own. With Central Canada being hit hard by the US slowdown, the Bank of Canada will be forced to drop interest rates. This will have a positive impact on BC’s housing market.

The key driver to the housing market is employment. With the unemployment rate the lowest it’s every been at 4%, it’s no wonder that our housing market will continue to remain robust. Wages have also been rising faster than inflation. The correlation between employment and housing makes a lot of sense. As people become confident of the job situation, they will want to own their own home (or upgrade to a larger home if their income increases).

What I take away from this is that if you don’t own your own home, you should seriously consider getting into the market as soon as it is feasible. Don’t bet against the experts. Even if you’re thinking that there will be a bubble (and I don’t know of any Canadian economist predicting a bubble), I suggest you hedge your bets a bit. Buy your own home. Since you’ll be there a while, you’ll be able to ride out any possible downturn while you enjoy the benefits of owning your own home.