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Tuesday, December 20, 2011
Variable Rate Mortgage Discounts Disappearing
From our friends at the Financial Post:
The days of getting any sort of discount on a variable rate mortgage are over — again.
Those mortgages, tied to prime, have become a mainstay of the housing market. And, why not? While prime has stood at 3% at most major financial institutions, the discount has meant a rate as low as 2.1% at times this year.
However, in the last 10 days what was left of that discount — it had already been shrinking for weeks — has disappeared at all of the major banks.
You have to head back to the credit crisis of 2008 to find a similar period where the discount disappeared. At the time, consumers were paying a 100 basis point premium above prime for the privilege of a floating rate.
The new reality is expected to reshape the mortgage market in the coming months, reversing a strong trend that had seen consumers roll the dice on interest rates, confident in the belief they were not going up.
How confident were they? Well the Canadian Association of Accredited Mortgage Professionals says 37% of consumers opted for variable rate mortgages over the last year, bringing the total percentage of those with a floating rate to 31%.
To be clear, anybody with an existing mortgage is unaffected until they renew. Why would you want to renew early or lock in if your present rate is 2.1%?
“If you have three and half years left on that term you are not going to give it up,” said Vince Gaetano, of Monster Mortgage, adding you can borrow at 3.29% if you lock in for five years or 3.09% for four years. “The last decade I’ve been telling people to go variable but I’m saying go fixed [for new clients].”
The other key advantage for a term five years or longer is you get to use the rate on your contract to qualify for a mortgage as opposed to the current five-year posted rate of 5.39%. The difference means you’ll qualify for a larger loan by locking in.
“People are being heavily compelled to lock in,” says Doug Porter, deputy chief economist with the Bank of Montreal, in talking about the negligible spread between short and long-term money. Will Dunning, an economist CAAMP, said his group was not surveying consumers the last time short-term rates climbed like this so he can’t be sure what the reaction will be this time around.
Meanwhile Farhaneh Haque, director of mortgage advice and real estate secured lending with TD Canada, says she’s already seeing the effects as people shy away from variable. Her financial institution is not offering any discount at all on prime these days, a move necessitated by rising borrowing costs for the bank.
“I think there is a whole different conversation that we are having now than we were a few years ago,” says Ms. Haque, adding at today’s rates fixed products have their own attraction. “The stability it offers with a low rate makes it more affordable.”
While Benjamin Tal, deputy chief economist with CIBC World Markets, doesn’t think variable rates premiums will rise above prime, the drop in the discount we’ve seen in the last few months could impact on the housing market.
“You know 80 basis points below didn’t make much sense either. I think variable at prime is the new normal. They won’t go higher unless we get a new crisis,” says Mr. Tal, adding banks were not making much money on variable with the steep discounts so they backed away from them.
Clearly there is no discounting how dependent the housing sector has become on cheap money.
Read the full story here: http://natpo.st/t6kzgr
Friday, December 16, 2011
Ultimate Hockey Experience Contest!
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* 10 pairs of Flames tickets valued at $324 per pair. Excellent seats!
* 1 GRAND PRIZE for an all expense paid trip for two to fly to New York City and see the Pittsburg Penguins play against the New York Rangers live at Madison Square Garden!
Wednesday, December 7, 2011
Why are Mortgage Rates so Cheap?
Interesting article from our friends at the Financial Post: as always, the TIME TO BUY IS NOW:
The reason Canadians can get such cheap money on a mortgage with as little as 5% down is mortgage default insurance, which is backed by the federal government for both Crown corporation Canada Mortgage and Housing Corp. and its private competitors.
Canadians pay steeply for that mortgage insurance, with premiums that can amount to 2.75% on the purchase price of their home. But in the end you have to wonder whether that government backing reduces premiums and amounts to a subsidy for Canadians buying with high-ratio mortgages.
Given all that, it's no wonder so many Canadians want to jump into the housing market - it's the only way to get access to that much cheap debt financing. You can almost argue by not buying into the housing market you have missed out on a government program that thousands of Canadians have cashed in on.
"My perspective is it's good value for Canadian consumers," said one bank analyst who did not want to be identified. It's even better value for Canadian banks because their loans are guaranteed by the federal government.
The rules in Canada are such that if you are buying a home with less than a 20% down payment and are borrowing from a financial institution covered under the Bank Act, you must get mortgage default insurance.
"Potentially it leaves Canadian taxpayers on the hook for a big bill if things go terribly wrong although I don't think there is any indication things will go terribly wrong," the analyst said. "There is a good argument that Canadian bank shareholders are being subsidized too."
Finn Poschmann, vice-president of research with the C.D. Howe Institute, says in a world without government backing some people with high credit scores might end up paying even lower mortgage default insurance premiums.
"In an unregulated world where you don't require insurance, your lenders would probably ask for it anyway. Your premium might be higher or it might be lower," Mr. Poschmann says. "You would have market level, personalized risk adjustment on the premium."
A disadvantage of insurance is you pay the fee up front, meaning if you sell your home you get nothing for that payout. Mortgage insurance is portable now to a degree so if you sell and buy another home, the disadvantage is limited.
The other question that hangs over the issue of default insurance is whether the mere existence of it has helped goose home prices in Canada. Given the average price of a home has more than doubled over the past 10 years, anybody who didn't get involved in this leverage based investment has missed out on a major financial opportunity.
Author Garth Turner says mortgage insurance has removed the risk for lenders and given borrowers a status they would not get for any other investment.
It's a status far above what their real risk level would be," Mr. Turner says. "If you are a lender wanting a 5% mortgage or 10% down payment you are high-risk, high-ratio client and normally under any credit-rating system in the world the higher the risk the higher return any lender would demand."
Nobody would give somebody with $50,000 in cash $500,000 worth of stock, but they give you that much if you are putting the money into a house. And once you've got that money, if your home is appreciating in value the way it has the past decade it almost seems like a slam dunk investment given how cheaply you can borrow.
"Some kid wandering into the bank who is 25 years old with 5% down buying a $500,000 condo is able to get the same rate as someone putting 80% down on a house in Rosedale," says Mr. Turner, referring Toronto's luxury home market. "CMHC has erased the traditional risk."
Given all that, how can you pass on leverage investment that offers you cash at rate you could otherwise never get?
Full article: http://natpo.st/uLpLdG
Friday, December 2, 2011
Calgary Housing Sales Trending Up
Categories:Calgary Market Trends
Calgary Housing Sales Trending Up
Stable Pricing Providing Opportunities for Buyers
Calgary, December 1, 2011 – According to figures released today by CREB® (Calgary Real Estate Board), Calgary residential sales in November increased eight per cent over last year, at 17,538 after the first 11 months of the year.
While sales activity tends to taper off in the winter months, so far this year Calgary area sales remain significantly stronger than levels recorded last year. Single family home sales totaled 962 for the month, an increase of eight per cent from November 2010. Meanwhile, year-to-date sales totaled 12,464, a 10 per cent increase over last year. Over the long term, however, sales remained a tepid 17 per cent below the 10 year average.
“Despite any global economic cautions, consumers are actively seeking well priced listings in the market, a reflection of their positive long term outlook for the city,” says Sano Stante, president of CREB®. “Following two years of employment losses, the current growth in jobs is translating into improvements in the housing sector and a more optimistic consumer.”
November listings have edged down over last year’s levels, decreasing by two per cent. Lower listings combined with the increase in sales helped reduce the months of inventory to less than four months.
The year-to-date average and median price of single family homes were a respective $467,140 and $406,500. Overall, prices remain relatively flat compared to last year.
“This stable pricing provides an opportunity for buyers in our market. The addition of historically low interest rates, combined with a good selection of inventory, makes it a trifecta,” Stante says. “With positive wage growth in the wind, this is a signal, and a reminder, that this market opportunity will not remain forever.”
Condominium sales for the first 11 months of the year totaled 5,074, a five per cent rise over the same period last year. Inventory levels declined to 1,676 units, helping push down the months of supply.
“The rise in condominium sales can be attributed to the confidence in the market, and is typical of this phase of a normal market recovery,” says Stante.
Condominium year-to-date average and median prices in 2011 were $287,545 and $261,500, respectively, a decline over the first 11 months of 2010, mostly due to increased sales in units priced under $200,000.
“Calgary continues to record impressive employment growth and long term fundamentals remain strong,” Stante concludes. “The strength in our economy, combined with affordability levels that outperform most major centers, will continue to attract migrants to the city and spur further growth in our Calgary housing market.”
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