On April 21, 2009, the Bank of Canada (BoC) announced their last rate drop (see the BoC rate announcement).  This brought down the overnight rate to 1/4% which is the lowest the BoC is able to go.   In that announcement, the Bank committed to hold the rate until “the end of the second quarter of 2010″.

It was no surprise that the forecasts from the major lenders were in line with the Bank of Canada’s announcement

• BMO expects interest rates to start rebounding in 3rd quarter of 2010 - BMO Economic Research Focus dated April 24, 2009
• CIBC World Markets forecasts the BoC to hold the overnight rate at its current level of 1/4% until the 3rd quarter of 2010 – CIBC World Markets April 28, 2009
• RBC forecasts the BoC staying at its current level of 1/4% until the 3rd Quarter of 2010 – RBC Financial Market Forecast dated April 3, 2009
• TD Bank did not provide a forecast – Read TD Economics Commentary dated April 21, 2009 of the BoC announcement to maintain the current overnight rate at 1/4%

Is it important to work with a mortgage professional that is up-to-date on interest rate trends? Absolutely!  The interest on your mortgage will be the biggest expense in your home purchase.  You’ll need a mortgage broker that thoroughly understands interest rate trends and how this affects your choice of your mortgage programme.

Stay up-to-date on interest rates and home buying trends by signing up for my e-newsletter at www.bcmortgage.ca/opt_in.htm .

On April 7, 2009, Genworth Financial advised lenders of changes in their mortgage insurance guidelines, making it more difficult to obtain mortgage insurance.

• The New Recommended Credit Scores For The Cash-Out Refinance Program Are As Follows:
  • 90.01-95% LTV: 700 (Increased from 650)
  • 85.01-90% LTV: 660 (Increased from 600)
• The Recommended Credit Scores For High-Rise (4+ Floors) Condominiums Are As Follows:
  • 90.01-95% LTV: 700 (No previous minimum)
  • 85.01-90% LTV: 660 (No previous minimum)
• The New Recommended Maximum GDS/TDS Ratio is 35/42% For All Credit Scores and All Products (previously 44% for credit scores over 680 and 35/42% for credit scores below 680)
• Investment Property (Rentals) And CreditAssist Are No Longer Eligible For High-Ratio Mortgage Insurance
• The New Maximum Loan-to-value and Recommended Credit Scores For The Business For Self (Alt. A) Product Are As Follows (Previous Credit Score Requirements In Brackets):
  • up to 90% LTV – 700 (previously at 650, only for purchases, not for refinances)
  • up to 85% LTV – 680 (previously at 650, purchases and refinances allowed)

The other two mortgage insurance companies, CMHC and AIG, and they have not announced any changes so far.  However, it is not inconceivable that changes will be forthcoming.

It is important that the bank or lender you are applying with has the ability to use either of the three mortgage insurance companies.   If you are not sure, you should go to a mortgage broker since we have access to all three insurance firms.  This gives you the most flexibility and options since each insurance company has its own guidelines which may not meet your needs.

On March 3, 2009, the Bank of Canada (BoC) announced a rate drop which brought the overnight rate down to 1/2%.   At the time, it was the consensus that this was going to be the last rate reduction until the economy recovers in 2010.  In that announcement, however, the BoC hinted at a possibility of one more rate drop.   The Bank stated that  the overnight rate can be expected to remain at this level “or lower “.  The “or lower”  part of the press release leaves open the option to reduce the overnight rate one last time.

Here is a summary of what the banks are forecasting:

• BMO favors one more rate reduction to 1/4 percent in April 2009 – BMO Capital Markets Rate Scenario dated March 4, 2009
• CIBC World Markets forecasts the BoC to hold the overnight rate at its current level of 1/2% -  CIBC World Markets Market Call dated March 2, 2009
• RBC forecasts the BoC staying at its current level of 1/2% – RBC Financial Market Forecast dated Mar 12, 2009
• Scotia Bank and TD Bank did not provide an interest rate forecast in March.  TD prepared a report entitled “The Perils of Ultra-Low Rates: The Canada Case“.  While there are precedents from other countries (e.g., Japan’s interest rate at 0.10%, US at 0.00-0.25%), problems could arise when interest rates approach close to zero.  There are implications for investors who will be earning close to nothing when investing in the money markets.  There are also implications for bank financing that is tied to the prime rate.

Stay up-to-date on interest rates and home buying trends by signing up for my e-newsletter at www.bcmortgage.ca/opt_in.htm .

With dropping interest rates, there’s a lot of talk these days about whether to break your current mortgage and switch to a lower interest rate mortgage.  Here are the issues you need to consider:

1. The pre-payment penalty – You need to phone your lender to determine the penalty since the fine print in the mortgage documents will determine exactly what they will charge you to break your contract.  Lenders will charge you a penalty to break a closed fixed rate mortgage.  It is based on the interest rate differential (IRD) or three months interest (whichever is higher).  The reason for this is because the lender won’t be able to earn the same yield if you were to pay them back since rates have gone down.  By locking-in you get the peace of mind that you’re rates will not increase if rates go up.  By the same token, if rates come down, the lender (and its investors) expect that the yield will be the same so they recover this loss by charging you a penalty.  Each lender will have in its mortgage documentation the exact calculation for the penalty.  The penalty can vary among lenders so I suggest you phone your lender and ask the exact amount they will charge to break the mortgage.   Once you know how much it will cost to break your mortgage, I can calculate how much you would save by switching to a lower rate mortgage.
2. The type of mortgage you want to switch to – Your options are to switch to another fixed rate mortgage or move to a variable rate mortgage.  You’ll obtain the most benefit if you were to switch to a variable rate mortgage.   If you switch to another fixed rate mortgage, you will often find (with exceptions) that the penalty will negate most of the savings.
3. Whether you have the cash to pay the penalty – If you have the cash to pay the penalty, your mortgage can usually be “switched” to another lender without having to pay the legal and appraisal fees.  If you don’t have the cash, the penalties can be added on to the new mortgage but this will be treated as a “refinance” transaction whereas you will have to pay for the legal and appraisal fees.   Secondly, adding penalties to the new mortgage will require that there is enough equity in the property.

In most cases, the decision boils down to your answer to the following question:  Where do you think interest rates are heading? If you think interest rates are heading up, you should lock into another fixed rate mortgage and extend the term.  On the other hand, if you are of the opinion that interest rates will either stay the same or drop, you probably want a variable rate mortgage.   At our practice, we take the time to meet with with our clients personally to discuss in detail  interest rate trends and the pros and cons of each option since we consider this to be a very important and complex issue.

Be aware that there is a time element to making this decision.  Once you’ve made the decision to prepay, you should act fast since the prepayment penalty will increase when interest rates drop.  I’ve had clients who hemmed and hawed when the prime rate was in the low 5% range and now, they are kicking themselves for not acting sooner.

Secondly, calculating the savings can be complex.  It involves calculating the cashflows over the life of your remaining term and obtaining the present value.  Be sure you make sure that your mortgage broker understands the complexities of this transaction.

One final word: If you’ve locked-in to a high fixed rate mortgage, you should look into this option.  It could save you thousands of dollars in future interest.  Once the transaction is costed out, there is no downside.  They way I look at it, the prepayment penalty is money I will pay until the end of the mortgage term.  Either I pay it now or pay it later so it isn’t really an expense. Your major expense will be your time and effort in gathering up the paper work.

Many homebuyers are startled to learn that after they arrange their mortgage they have to pay a range of additional fees to finalize the deal.  It pays to be informed, and we can advise you on these closing costs and on how you might be able to lower them.
What Are Your Closing Costs?
Your exact closing costs will depend on where you live, how much you are borrowing, how you finance your mortgage and your closing date.  Here are some of the most common costs:

1. Lawyer’s Fees – These vary across BC, and we can refer you to a lawyer who can assist you with your transaction
2. Mortgage Appraisal Fees – Lenders require an evaluation of the mortgage lending value of a property.
3. Land Survey – The legal written and/or mapped description of the location and dimensions of your land, obtained from an accredited land surveyor.
4. Title Insurance – May be purchased in lieu of a land survey in some cases.  Provides protection against several defects such as problems with the property that would have been revealed by an up-to-date land survey.
5. BC Land Transfer Tax – Buyers must pay this tax to the the provincial government when the property’s title passes from the seller.  The tax is equivalent to 1% of the first $200,000 and 2% of the amount above that.  First time home buyers can be exempt from this tax.
6. High Ratio Mortgage Insurance – Needed if you are buying a home for less than 20% down. This is a cost of obtaining a low downpayment mortgage and strictly a closing fee.  Most borrowers add this fee to the mortgage.
7. Home Inspection Fee – an objective visual examination of the physical structure and systems of a house, which most buyers opt for.

When you come in for a consultation, we will discuss what you need to prepare for in terms of closing costs so you are well prepared for the closing of your transaction.