Monthly Review of Interest Rate Forecasts from the Major Banks

Not surprisingly, the Bank of Canada (BoC) held their benchmark interest rate on July 15 at 3.0%. The Bank cited three main developments affecting the Canadian economy: (1) economic weakness in the US; (2) on going turbulence in the Global Financial markets and (3) a sharp increase in commodity prices. As a result, the major bank’s prime rate remained at 4.75%.

Our roundup of the Big 5 Bank’s economic forecasts show that, for the most part, economists at these institutions are expecting rates to stay the same until the 1st or 2nd quarter of 2009. The lone exception was Scotia Bank which expected the prime rate to drop to 4.25% (from our current 4.75%) in the 1st Quarter of 2009.

Here is what they are saying:

• TD Economics – “we continue to expect the Bank of Canada to remain on the sidelines, leaving interest rates unchanged at their current level until the second half of 2009.” – TD Economics Weekly Bottom Line July 18, 2008
• Bank of Nova Scotia – BNS is forecasting a drop in the prime rate to 4.25% by the 1st Quarter of 2009. Pls. see Canadian interest rate forecasts on page 3 – ScotiaBank Economics July 21, 2008.
• BMO – The bank is forecasting the prime rate to stay where it is until Mar 2009. Pls. see BMO’s Forecast summary on page 1 of BMO’s Rate Scenario July 3, 2008.
• RBC – “The next move by the Bank of Canada is likely to be a rate hike in early 2009 as the economy’s growth momentum builds going into 2009.” — RBC Financial Update July 2008.
• CIBC Wood Gundy – The Bank of Canada holding steady until Mar 2009. Pls. see CIBC World Market’s Strategic Econ for June 26, 2008

What is a good credit score for a mortgage application?

This is a question I get quite often. With tightening credit standards in the atmosphere, it is important to know what number you should aspire for. Many lenders use the credit score to determine whether you qualify for a mortgage, how much you could qualify to purchase and how much down payment you will need to place towards a home.

In my professional opinion, I would say that if your score is over 720, you have nothing to worry about. You should qualify for almost any type of mortgage with this score. For a zero down mortgage (which is about disappear with the new government regulations), the minimum credit score requirement is 680.

A score of 720 score is really not that hard to achieve. This would put you in the upper 60% of the population. At this level, your credit bureau will probably show that you meet all your debt obligations on time and you’re not maxing out on your credit cards.

The new government rules that is set to take effect on Oct 2008 will require a minimum credit score of at least 620 to obtain a mortgage with 5% down payment. At a score of 620, the lender will want to understand why your score is low. If the lower score is due to repeated delinquencies or collection items, then your application could still be denied. However, if the reason is because of say, high balances on your credit cards, then some lenders may find this acceptable.

A lower credit score can costs thousands of dollars in extra interest costs or missed opportunities. So, if you are planning take out a mortgage or refinance your home, you would be well advised to make sure that your credit score is as high as it can be. If you are unsure as to how to increase your credit score, I strongly recommend that you consult a mortgage broker. I am always happy to educate anyone who would like to learn more about how your score is arrived at and help you develop a strategy to raise your credit score.

Zero Down & 40 year Amortization Mortgages to End on October 15, 2008

The Department of Finance today announced that it would change some of the rules for high-ratio mortgages, and that “these requirements will apply to all government-backed mortgage insurance policies (whether issued by CMHC or private insurers) for high-ratio mortgages on residential properties with up to four units.” These rules will come into effect on Oct 15, 2008. If you are in the market and would like to avail of a zero down mortgage or a 40 year amortization mortgage, you need to act quickly. For that matter, there may be added documentary requirements for borrowers applying under stated income programmes.

Here are some highlights of the changes:

1. Maximum amortization reduced to 35 years for new government-backed mortgages.

2. Minimum 5% down payment for new government-backed mortgages. Borrowers may borrow their 5% down payment, but it will not be insured under the new guarantee framework.

3. New credit score floor of 620 for new government-backed mortgages. There will also be limited exceptions to this rule, recognizing that there are some borrowers with credit scores below 620 that otherwise represent a low credit risk.

4. Minimum loan documentation standards “to ensure that there is evidence of reasonableness of property value and of the borrower’s sources and level of income.” The Department of Finance’s announcements today did not elaborate on this point.

5. No government guarantee for high-ratio mortgages where no amortization is required in the first few years. This includes high-ratio mortgages that begin with “interest-only” payments and HELOCs.

6. Maximum of 45% on borrowers’ TDS ratio for new government-backed mortgages.

Exceptions would be allowed after October 15th where they are needed to satisfy a binding purchase and sale, financing, or refinancing agreement entered into before October 15, 2008. Canadians who already hold mortgages will not be affected by these changes.

The Department of Finance stated that “today’s announcement marks a responsible and measured approach by the government to ensure Canada’s housing market remains strong and to reduce the risk of a U.S.-style housing bubble developing in Canada.” It also noted that mortgage arrears in Canada have remained low in recent years.

Here is the link to the Department of Finance announcement: http://news.gc.ca/web/view/en/index.jsp?articleid=409769&categoryid=16