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Issue No. 7                    "Representing Your Best Interest!!"April 30 , 2010

Rates continue to rise, but many do not see why?

Interest rates are rising - we all get that - but it looks like the Big Banks are pushing things a bit with mortgages.

After a pair of increases in the past two weeks, the posted Big Bank five-year fixed mortgage rate now stands at 6.25 per cent. Does that seem high to you? In fact, it's just half a percentage point below the average level for the past decade!

We're supposed to be in the early phase of what could be a long cycle of rate increases! The Bank of Canada hasn't even started raising its overnight rate, which sets the trend for borrowing costs other than fixed-rate mortgages. The overnight rate could very well start rising June 1 (that's the central bank's next rate-setting date), but even then it's not dead certain that rates will move.

Mortgage fixed rates are linked to bond yields, which have been rising for a while now. But mortgage rates have been moving faster.

Thanks to the always helpful Bank of Canada online interest rate database, we know that the yield for five-year Government of Canada bonds has averaged 4.03% since the beginning of 2000. Five-year Canada bonds had a yield of 3.02% yesterday, which means they're three-quarters of the way back to their average of the past decade.

The 10-year average for posted five-year fixed-rate mortgages is 6.75%, which means this rate is only .50% behind its long-term average. There is zero consensus that things have normalized after the financial crisis, but the banks are just about all the way back to pricing mortgages as if they were!!

And, no, this "go big or go home" attitude to rates has not been extended to guaranteed investment certificates, which are one source the banks use for the money they lend out as mortgages. The current posted Big Bank five-year GIC rate tops out at a whopping 2.1%, or only 63% of its 10-year average rate of 3.31%.

John Turner, director of mortgages at Bank of Montreal, said the banks are simply reacting to the rising rate environment in setting borrowing costs for mortgages.

"It's not about any of us trying to get ahead of things, because the market won't let us," he said. "It's a very competitive market."

Mr. Turner cited two factors that have driven fixed-rate mortgages lately. One is an effort by the banks to anticipate higher bond yields and avoid repeated increases in mortgage rates. "We don't like to move rates because it causes dissatisfaction, and it causes disruption in the sales force."

The other driver of higher mortgage costs is the rising cost of providing interest-rate guarantees for people who are smart enough to lock in a rate as soon as they start looking for a home. Mr. Turner said these costs haven't been a factor much in recent years because the general trend for interest rates has been downward. Now, with rates on a definite upward path, rate guarantees are a bigger consideration for lenders.

Mr. Turner's comments about the mortgage marketplace being too competitive for banks to be out of line with their mortgage rates is true. In fact, there is a huge variation in rates right now that demands some shopping around from homebuyers and people facing renewals.

 Call us today for any  pre-approvals!!!!
Rod Minnes
Managing Broker

Rates as of April 30, 2010
Fixed Rate Mortgages  
6 month convertible           4.90%
1 year open                          6.50%
1 year closed                       2.49%
2 year closed                       3.20%
3 year closed                       3.95%
4 year closed                       4.34%
5 year closed                       4.49% 

Variable Rate Mortgages    
5 year closed - Prime* - .50%  ****
5 year open   - Prime* + .80%

Home Equity Line Of Credit

Please call for product availability and rates.

Information from sources deemed to be reliable. Product availability and borrower qualification apply.
*Prime = 2.25%
Rod Minnes
Global West Mortgage

Getting into a Variable Rate Mortgage Harder Today!!

The federal government announced last month new requirements for anyone borrowing money for a house and needing mortgage insurance. If you have less than a 20% down payment and are borrowing from a financial institution covered by the Bank Act, you have to take out mortgage default insurance, which ensures the banks are covered for any losses resulting from payment defaults.

For principal residences, the new rules force consumers to qualify for a loan based on being able to make payments on a five-year fixed-rate mortgage, which has a much higher interest rate than variable mortgages, now as low 1.75%.

Clearly, Ottawa's view was toward rising rates. And this week, two of the major banks raised their posted rate on five-year fixed mortgages to 6.10-6.25%.

But one lingering question was how the five-year rate would be calculated in terms of qualifying a customer. In other words, it would obviously be a lot tougher to qualify for a mortgage under the new rules when using the posted rate of 6.25%. But if using the actual rate consumers get -- these days as low as 4.49% -- that's a lot less income you'll need to buy your new home.

But an internal document distributed by Canada Mortgage and Housing Corp. to mortgage brokers shows consumers will be able to use their "actual rate" to qualify for a mortgage if they go for a term five years or longer.

If buyers want a variable-rate mortgage, they will have to qualify based on "the benchmark rate," which is set by the Bank of Canada, currently 6.10%.

So, if you want to go short or variable, you had better be able to make payments based on an interest rate as high as 6.10%, which is where the benchmark rate will likely sit for awhile.

Probably 20% of the overall mortgage population is going to be affected by this rule in the sense they are no longer going to be able to qualify for a variable-rate mortgage or a one- to four-year term. The qualifying rate is going to affect the debt ratios of those people.

The end result may see more people forced to lock in their rate, which would hardly seem fair given variable-rate mortgages have been a better deal than fixed-rate mortgages about 90% of the time over the past 50 years, before the recent credit crisis.

"This will help people become accustomed to making payments based on where mortgage payments are likely to be going," said Peter Vukanovich, chief executive of Genworth Financial Canada, the mortgage insurer.

He doesn't think the changes are a major deal, given that most of the major banks have been qualifying consumers based on their four- and five-year rates. His company was already only insuring products based on rates as high as 4%.

Lenders have been qualifying borrowers at posted rates for variable mortgages for awhile now, but with rates increasing and the qualification ratio's tightening, we will likely avoid a run on Variable Rate mortgages. This is not all bad, and will protect many people from increasing mortgage payment shock, which happened in the USA and led to the current situation down there! Our financial set up is not always easy to deal with, but it does protect our market from major problems and we should be thankful for that!

Embrace the changes, we all knew they were coming, now we need to adapt and make them work in our favor!