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.