Monthly Review of Interest Rate Forecasts from the Major Banks

The Bank of Canada (BoC) surprised financial markets by holding rates on June 10 siting higher inflation risks. With the expectation of a BoC rate drop, the financial markets had already priced-in lower fixed interest rates. When the drop did not materialize, fixed rates increased by 1/4% across the board.

With the BoC’s overnight rate remaining static, variable rate mortgages remain unchanged.

For now, economists at the Big 5 Banks agree that rates (i.e, for variable rate mortgages) will hold. Here is what they are saying:

1. TD Canada Trust – “…we think that the Bank will do what it can to avoid making any interest rate moves in the near term, raising rates only when the economy is back on track. To us, that means the overnight rate will remain at 3.00% until the second half of 2009.” — TD Quarterly Economics Forecast dated June 18, 2008.
2. Scotia Capital – “…The BoC left its overnight rate unchanged at 3.00%. Policymakers appear likely to remain on hold for the time being, with the accompanying statement shifting focus to the upside risks to inflation, noting that global growth and commodity prices have been higher than expected. Still, future rate reductions are not off the table yet. The BoC retained its view that core inflation only gets back up to 2% by 2010 and still points to downside risks to growth. –Scotia Capital Weekly Trends dated June 13, 2008
3. CIBC World Markets – “…We’re inclined to take Carney at his (new) word, and expect that the next move will be a rate hike in 2009. “– CIBC World Markets Economic Flash dated June 10, 2008 .
4. RBC Economics – “…The Bank of Canada is unlikely to switch to a tightening policy stance in the near-term, especially with the economy growing at a slower-than-potential rate this year.” — RBC Economics Report dated June 10, 2008
5. BMO Capital Markets Economics Research – Please refer to BMO’s economic forecast on Page 7 showing the overnight rate at 3% (unchanged) until the end of 2008. BMO report dated June 13, 2008 .

Treatment of Rental Income for Investment Properties

Are you looking to purchase rental property? Purchasing a residential investment property is more complex compared to purchasing an owner-occupied property. This type of mortgage is also considered higher risk. Many lenders will not finance investment properties. Secondly, the treatment of rental income from the property will vary widely from lender to lender. Thirdly, owner-occupied rental income (such as a house with a basement suite, duplex, triplex and fourplex property) is treated differently from an investment property which is not partially owner-occupied.

Here are some of the ways, lenders treat the income from a rental property

• A percentage of rental income (usually 50%) is added to the borrower’s income
  • This is the more conservative approach to using rental income for qualification purposes. This is also the most common approach used by mainstream lenders. For example, if the property can rent for $1000 per month or $12,000 per year, lenders will add $6,000 (or 50% of $12,000) to the borrower’s income to qualify the mortgage. As it often happens with mortgages (especially those in the Metro Vancouver area) that the mortgage payments are higher than the rent income. With this method, qualifying for a mortgage to purchase a rental property will require a much higher income for the borrower.
• Rental Offsets (50% – 100%)
  • A more aggressive approach is using a rental offset. With this approach, the rental income is treated as a deduction from your mortgage payments. The percentage rental offset may vary from between 50% to 100%. This will depend on the lender’s policies, whether the mortgage is an insured mortgage, whether this property is owner-occupied and of course, your overall credit.
  • Here’s an example using an 80% rental offset. Say, for example, that a property’s carrying costs (consisting of principal, interest, property taxes and heat) is $1,100 per month and the property can rent for $1,000 per month. In this scenario, the lender will use 80% of the rental income of $1,000 or $800 and deduct this from the carrying costs of $1,100. This results in a negative cash flow to you of $300 per month. If you can afford to make this extra payment, you can easily qualify for this purchase.