15 Dec

FED HIKES RATES FOR FIRST TIME THIS YEAR

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Posted by: Dr. Sherry Cooper

Chief Economist, Dominion Lending Centres

Rarely has there been a more widely expected result as today’s 0.25 percent rate hike by the Fed. This is the second interest rate increase since the Fed started the current process of interest rate re-normalization one year ago. Although, many had called for additional hikes earlier this year, the policy makers held the overnight rate steady until now.In today’s press release, the Federal Open Market Committee (FOMC) said it currently sees the US economy strengthening and the labour market tightening. The unemployment rate has fallen more than earlier forecasted and household spending has been rising moderately. Inflation has increased since earlier this year, but remains below the Committee’s 2 percent longer-run target, partly reflecting earlier declines in energy prices and in the prices of non-energy imports as the US dollar has strengthened. Inflation in wages, salaries and benefits have risen considerably, but still remains low. Inflation expectations remain well anchored at low levels.

One area of economic weakness highlighted by the Fed is business fixed investment. The same disappointing behaviour is evident in Canada as well as businesses have refrained from adding meaningfully to plant, machinery, equipment or software. This troubling weakness has weighed heavily on productivity.

The FOMC intends to increase the target overnight federal funds rate only gradually, which it now considers to be consistent with GDP growth of 2.1 percent next year, up from the earlier median forecast of 2.0 percent. The median forecast for 2018 remains at 2.0 percent and is up slightly to 1.9 percent in 2019. The Fed’s median estimate of longer-term potential growth remains steady at 1.8 percent, roughly in line with the Bank of Canada’s forecast for Canadian potential growth. The range of Committee forecasts is 1.6 to 2.2 percent in the US.

The Fed sees the near-term risks to the forecast as balanced. The target range for the federal funds rate is now 1/2 to 3/4 percent, which is deemed to remain accommodative, thereby supporting some further strengthening in labour market conditions and a return to 2 percent inflation.

Committee members believe that only a gradual rise in interest rates is warranted given the low level of inflation. Moreover, they expect the federal funds rate will remain below the longer-run expected rate for some time. According to the newly released forecasts of individual members, most expect to the Fed to hike rates three times next year, although the range of estimates is relatively wide. Actual rate hikes, as always, will be dependent on economic data, market movements and global developments. Most members estimate that the longer-term federal funds rate is likely to be 2-3/4 to 3.0 percent.

The markets are watching for the reaction of the President-elect to today’s Fed release. President-elect Trump accused the Fed during the election campaign of being politically motivated in keeping rates steady this year. There is some concern that the Trump administration might threaten the independence of the Fed, in direct contrast to recent presidential policy. Many are expecting PEOTUS to tweet his opinion of today’s move.

The Bank of Canada will not follow the Fed’s move. Canada’s economy is weaker than that of the US and inflation remains low. Although oil prices have increased recently owing to OPEC and non-OPEC announcements of production cuts, the future path of oil prices remains uncertain.

Longer-term interest rates around the world have spiked since the Trump election as stock markets have rallied. This has driven up mortgage rates in Canada. It is widely expected that the Trump administration will cut tax rates and increased government spending, thereby conducting a very stimulative fiscal policy. This is the reason for the rise in longer-term interest rates. The validity of this view remains to be seen, but such action would likely have most of its impact on growth in 2018 and beyond.

8 Dec

AMERICAN PRESIDENTIAL IMPLICATIONS ON REVERSE MORTGAGES IN CANADA

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Posted by: Roland Mackintosh

HomEquity Bank – Business Development Manager

Donald TrumpIt’s been a month since Donald Trump stunned the world by beating Hillary Clinton and his presidential win is already affecting many Canadians. Who else but Donald could wipe out more than 1 Trillion dollars in the bond market [1] as investors worry about his campaign promises to cut taxes and take on massive amounts of debt?

But what does this have to do with Reverse Mortgages in Canada?

Bottom Line: they could become more expensive. In fact, all mortgages in general could become much more expensive, relative to the low-interest rate environment that has surrounded Canadians for over a decade.

Bond Market = Funding Source of Mortgages. One of the primary funding sources for banks’ lending out money is the Bond Market. Banks make their money on the spread between how much interest they have to pay investors to borrow money and how much interest they charge clients on their mortgage. When banks costs increase, it usually translates into an increased cost to consumers.

Bonds are a bit tricky to wrap your head around at first, but it is an interesting global market (accounting for over 100 Trillion Dollars [2]), and it’s worth getting the basics down.

One of the most important things you need to know about bonds: the value of bonds moves in the opposite direction to interest rates. When interest rates rise, the value of bonds becomes lower.

To help illustrate, I’m going to use a very basic example using a 10-Year Canadian Bond:

If you purchased a bond 5-years ago for $1,000 that was earning 6%, and sold it on the bond market today when interest rates were only 2%, would you sell your bond for $1,000? No, it would be worth much more to investors as they can only purchase bonds earning a 2% yield.

Now, let’s say you purchased a bond today for $5,000 that was earning you 2%. If, in 5-years from now, rates rose to 4%, what do you suppose would happen to the value of your bond? Right! It would be worth far less, as you’d be selling investors a bond that is earning them less than they can purchase on the market.

Donald Trump’s talk of issuing massive amounts of debt, cutting taxes, trade wars and higher tariffs, has investors very worried about interest rates rising – and rising interest rates has the bond and the mortgage markets worried.

BMO Bank of Montreal senior economist, Sal Guatieri, is quoted: “The market has really re-priced interest rates higher right across the yield curve, and some of those pressures have spilled over to Canada as well. We’re seeing our 10-year Government of Canada bond yield now up about 30 basis points compared with before the US election. So that’s a pretty meaningful move in long-term rates over such a short period of time”.

By coincidence, RBC Royal Bank has raised its 5-year fixed rate by 30 basis points which goes into effect tomorrow. What does this mean to the 5.78 million seniors living in Canada? If they own a home and are looking into a reverse mortgage, locking into a 5-year fixed rate might be a good option for consideration.

If you are considering a Reverse Mortgage for yourself or a loved one, contact the mortgage professionals at Dominion Lending Centres.

*A version of this post was originally published by Roland Mackintosh on LinkedIn Pulse.

1. http://www.reuters.com/article/us-usa-election-bonds-idUSKBN1380VP
2. http://www.zerohedge.com/news/2016-11-01/did-100-trillion-global-bond-bubble-just-burst

 
 
 
7 Dec

FINANCING OPTIONS FOR CONVENTIONAL BORROWERS

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Posted by: Pauline Tonkin

Dominion Lending Centres – Accredited Mortgage Professional

To understand financing options for conventional borrowers – ask your Dominion Lending Centres Mortgage Broker.  In October 2016 the Federal Government announced some significant changes to mortgage rules for high ratio borrowers.  Changes for high ratio mortgages took effect Oct 17th.  Changes for conventional borrowers took effect Nov 30th.  These changes will result in tighter guidelines to qualify for a mortgage, pressure on rates and may impact home prices in a market which has already been softening in recent months.

 

Let’s clarify the difference between a high ratio and conventional mortgage so we are all on the same page.

A high ratio mortgage occurs when a borrower has less than 20 percent down payment for their property purchase.  The mortgage must be insured through one of the main insurers and the client pays a one-time premium which is rolled into the mortgage.  A conventional mortgages occurs when a borrower has more than 20% down payment which means the mortgage does not require insurance coverage and no additional premium cost. In the case of rental properties or special mortgage programs an insurance premium can apply at a cost to the borrower.

Effective November 30th, all conventional borrowers are required to qualify at the benchmark rate (currently 4.64 percent) and a maximum of 25 year amortization for all mortgage terms if the lender is insuring the mortgage.  In recent years banks  and credit unions have opted to insure some of their conventional mortgages through CMHC, Genworth or Canada Guaranty.  Mortgage companies are required to insure their portfolio of mortgages through these insurers if they source their funds through investors rather than using their own money.  Since they are not a bank they do not have deposits to savings or chequing accounts.  With an insured mortgage the lender transfers their risk of lending to the insurer in the event of default by the borrower.  The mortgage is granted with insurance coverage and includes a mortgage premium.  The lender covers the cost of this insurance so many borrowers would not have any idea if their conventional mortgage was insured or not.

Because mortgage companies insure their mortgages the announcement of the new rules had an immediate impact on their business and what they can offer as competitive products to consumers.  Banks have the option to but don’t have to insure their conventional mortgages and can follow the previous rules for qualifying at contract rates and 30 year amortizations. However as expected, the banks have announced a premium to the interest rate for borrowers to access the 30 year amortizations.  So rates have increased for all mortgages over the past couple of weeks by 20 basis points, for 30 year amortizations an additional premium will be added and a further premium for rental properties.  Bottom line the cost to borrower has increased.

Over the past 20+ years the increase of mortgage companies has created competition for the banks.  There are some concerns these changes to mortgage rules will mean the exit of some mortgage companies from the market place and limit the competition for consumers on rates and products.  We have seen rate increases in the past few weeks which may be in part in response to the changes.  Although after the fiscal year end of October 31st rates typically rise so this may be a non-event.  As the deadline for the new rules for conventional mortgages passes some mortgage companies who fund with their own money have announced shifts to their products and rates to offer competitive options to consumers.  The good news is there is always the power of choice.

Your Dominion Lending Centres mortgage broker will continue to work with the banks, credit unions and mortgage companies so nothing has changed in that regard – business as usual.

As an independent mortgage broker I can access all lending options including 30 and 35 year amortizations.  In addition there are solutions for rental property owners, financing options for self-employed people and alternative financing for those borrowers who do not fit within traditional offerings. Now more than ever it is important for consumers to consult  with your mortgage broker to review any important aspects of your financial picture, address any concerns and source best solutions.

For assistance with your high ratio mortgage or to understand financing options for conventional borrowers – ask your DLC Mortgage Broker.

6 Dec

10 THINGS YOU SHOULD KNOW ABOUT BUYING A STRATA

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10 THINGS YOU SHOULD KNOW ABOUT BUYING A STRATA

 Posted by: Kathleen Dediluke

Dominion Lending Centres – Accredited Mortgage Professional

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Strata condominiums or townhouses are a popular home options with many benefits including providing little personal maintenance, the ability to live in a more populated area, among others.

10 Things you should know about Condo and Townhouse Strata Properties

  1. Each Strata lot typically has one vote.
  2. You may have a monthly strata fees which will cover common area maintenance, management expenses, maintain the contingency reserve funds minimum requirements and more.
  3. Rules will be in place regarding things such as if pets are allowed, where you can park, what can be placed on your patio, if you can rent the unit and more.
  4. Rules can be changed. Typically a 3/4 vote in favour of a change will be required.
  5. You can be fined if you break the rules.
  6. Age restricted properties are more difficult to finance as lenders believe it affects marketability.
  7. The Fire Insurance covered by the strata fees is for common property and buildings. Personal belongings are not covered under the Strata’s insurance.
  8. For mortgage qualifications half of the strata fees will typically be used in your debt servicing calculations.
  9. Unless a 3/4 vote opposes the requirement for a Depreciation Report a Strata’s with 4 or more strata lots is required to have a Depreciation Reports done every 4 years. The report covers all common areas and structures which help determine long term maintenance requirements and costs.
  10. Special assessments where you have to pay lump sum amounts may happen if the strata votes for major upgrades or if contingency accounts need to be topped up.

Always best to do your due diligence by reading through the last two years of strata minutes, the depreciation report and analyze the financial reports before you buy a strata unit. Once you have purchased, be proactive in protecting your investment by attending strata meetings or joining the strata council.

Looking to buy a Strata Property? Get started by contacting your local Mortgage Professional at Dominion Lending Centres!