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| Watch the Bond Market for Rate Hike Clues |
| Friday April 30, 2010 03:14 PM |
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By Andy Holloway, Financial Post April 6, 2010
It’s not necessary to understand the intricacies of how bond markets work to figure out where fixed mortgage rates are heading, just pay attention to patterns in yield changes.
It’s not necessary to understand the intricacies of how bond markets work to figure out where fixed mortgage rates are heading, just pay attention to patterns in yield changes.
Photograph by: Fotolia, Fotolia
Anyone caught off-guard by mortgage rate hikes by five of Canada’s banks during the last week of March probably wasn’t paying attention to the bond market – and, let’s face it, that means most people.
A common misperception is that mortgage rates follow the Bank of Canada’s overnight lending rate. While it’s certainly true that we’ve seen historical lows in both over the last few months, the central bank only affects variable mortgage rates. Fixed-rate mortgages are affected by government bond yields, which have been trending upward for the past six weeks.
The reason? Bond traders are expecting the Bank of Canada to either raise rates sooner than the planned date of July 20 or be more aggressive in raising them than previously anticipated. Typically, the bond market moves two to four months before the Bank of Canada does.
“The bond market is a live market that can change and fluctuate constantly, but they typically move in anticipation of events, not the events themselves,” says Peter Kinch, a Vancouver-based broker. “It’s almost like a speculative market.”
Another reason behind the increase, says Benjamin Tal, senior economist at CIBC World Markets, is that U.S. government bond yields are rising and that often impacts Canada’s bond yields. “Long-term rates in the U.S. are going up primarily because of the fact that people are becoming concerned about the ability of Obama to fund the debt,” says Mr. Tal. “Unfortunately, you and I are paying for Obama’s healthcare program in a way.”
That won’t make anyone looking for a mortgage feel better. Almost all the major banks boosted their five-year mortgage rates by 60 basis points to 5.85%. Mortgage rates generally rise at a one-to-one ratio with bond yields, says Tal, and the benchmark five-year government bond yield on March 29 was 2.9%, up about 50 points since Feb. 8 and a 17-month high.
Banks like the difference between the five-year bond yield and their best — not the posted — five-year mortgage rate to be between 90 and 110, says Mr. Kinch (although others suggest the spread is 125 to above 135. That spread is the profit between what banks can secure money at and what they can sell it at in the form of mortgages.
Mr. Kinch says it’s not necessary to understand the intricacies of how bond markets work to figure out where mortgage rates are heading, just pay attention to patterns in yield changes, which are readily available online. When the spread between bond and mortgage rates goes too high, banks bring their rates down, and when the spread dips, they increase them. Since 1980 there has been a 97% correlation between the two rates on a monthly basis.
“The spread was either getting too close to 90 or may have slipped below 90, and since they were anticipating a further increase in bond yields, they priced in a 60-basis point increase to give them a buffer and create a bigger spread,” says Mr. Kinch. “If they were wrong in their predictions, they will adjust them next week.”
Mr. Kinch believes a 25-point rise in the overnight lending rate, maybe as soon as April 20, is more likely than something dramatic. That would give Bank of Canada governor Mark Carney a chance to assess any fallout before raising the rate again. However, if it looks like he’ll stand pat, bond yields will likely come down, followed by mortgage rates.
Even though bond yields change almost every day, mortgage rates don’t because that would cause consumer confusion. “Banks will move when they feel the increase is not a one-off thing,” says Mr. Tal. “They don’t want to drive everyone crazy with changing mortgage rates.”
Banks are also more likely to respond quickly to rising bond yields than they are to dropping yields, according to a Bank of Canada study in 2009 called Price Movements in the Canadian Residential Mortgage Market. That’s partly because banks generally offer 60 to 120-day rate guarantees and early payment options, both of which cost the lender if rates rise.
There are exceptions, especially if banks sweeten the pot to buy customers with lower rates. For example, bond yields on March 9 went up, but mortgage rates at RBC and BMO actually fell.
Those days would seem to be over for now, but there could be 20- to 30-point dips in mortgage rates even as they generally rise, says Mr. Kinch. “You’d be foolish to expect rates to go back down again,” he says. “The rates we saw last week, I’d be surprised if we see those again maybe in our lifetime.”
Mr. Kinch was advising people to lock into low five-year rates earlier in March after noticing the steady rise in bond yields, but notes that rates are still near historic lows. Jittery first-time homebuyers looking for security should take a fixed five-year mortgage, but consumers comfortable with a variable mortgage can find rates at less than 2%. However, Mr. Kinch recommends boosting the monthly payment to a level that would be similar to a 5% fixed rate. That accelerates debt repayment and helps adjust for higher rates down the road.
© Copyright (c) National Post
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| Pre approved or Pre qualified? |
| Tuesday April 20, 2010 02:59 PM |
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Both these terms are now used to describe the action of seeking a mortgage approval before actually negotiating a property purchase. Unfortunately, in most cases, the borrower is not really fully approved for the mortgage & the lender does little or nothing to actually qualify the borrower.
What actually occurs is the typical lender provides an interest rate guarantee for a period of time, usually to a max of 120 days. The borrower is advised that they are pre approved & can begin shopping for a home.
At the pre approval stage, many lenders do not review credit or even determine if the client meets their guidelines for income & down payment. Lenders begin the actual qualification process when the file goes 'live' (meaning the Borrower now has an accepted Contract of Purchase). At this point the lender will begin a serious examination of the borrower's qualifications & may refuse to proceed with the pre approved mortgage for a wide variety of reasons. Because of this, it is very important for purchasers to keep their offer to purchase 'subject to mortgage approval'.
If rates have risen since the original pre approval & the lender now declines the mortgage, the client may no longer be able to get as good a rate elsewhere. Borrowers can reduce the chance of disappointment & get full approval faster by working with a professional Mortgage Broker early in the process. A broker will often recognize potential concerns & address them directly with lenders at the time the pre approval is requested. It may even be prudent to gather employment & income documentation at this stage, particularly for individuals who are self-employed or have had changes or inconsistencies in income or employment. Gathering documents early also helps reduce stress & waiting time after that hard search for the right property at the right price!
A Mortgage Broker is an experienced professional & will assist in reviewing & advising clients in the process.
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| GREAT rates! |
| Tuesday April 20, 2010 11:58 AM |
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I still have a variable rate of Prime - 0.5% available.
That works out to 1.75%!
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| Down Payments |
| Monday April 19, 2010 02:59 PM |
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Today is the day the new mortgage qualification rules come into play. I have received a number of phone calls and emails today regarding down payment requirements.
If you are buying a residence for yourself to live in, you will need a minimum down payment of 5%.
If you are buying a residence for yourself to live in and the house has a rental suite, the minimum down payment required is still 5%.
If you are buying a revenue property that you are renting out and not living there, you will need a minimum down payment of 20%.
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| Wow! What a week |
| Wednesday April 14, 2010 01:55 PM |
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I must say this was one of the busiest weeks I have had as a Mortgage Consultant. The lenders I work with have received a record number of deals and their underwriters are working feverishly to put together each mortgage in a timely fashion.
It is crucial when purchasing a new home, to make your offer subject to financing and to allow 5 business days, at the very least, for your mortgage to be arranged. Often it takes up to the final hour on day five to have your financing in place because the underwriters are so busy.
Thank you so much to my fabulous clients for being so organized and patient during their waits! Congratulations this week to Jillian and Craig, Jill and Robert, and Andrew on buying your first homes.
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| National Home Ownership Week |
| Friday April 09, 2010 04:19 PM |
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National Home Ownership Education Week aims to help home buyers get the facts
The first-ever National Home Ownership Education Week, created by Genworth Financial Canada, kicks off next Monday, April 12.
Customers can visit HomeownershipHelp.ca each day from April 12 to April 16 where they’ll find the facts and tools they need to make more informed decisions and buy their next home with greater confidence.
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| How women and men differ when buying a home |
| Friday April 09, 2010 01:38 PM |
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Genworth’s research into attitudes about the housing market shows that women tend to be more worried and anxious about finances than men, and feel they have less understanding of the homebuying process.
The research suggests a few key benefits that women may be more likely than men to be looking for when making mortgage decisions:
* Simplicity. More women than men said a simple and easy-to-understand mortgage structure is important (73% versus 60%).*
* Homebuying help. Women find the home-shopping process more stressful than men (43% versus 32%).*
* Lower carrying costs. More women want the security of a low monthly mortgage payment (65% versus 49%).**
* Financial reassurance. Thinking about their financial future makes women more anxious than men (54% versus 41%).*
The findings support the need for tools and resources that can help all home buyers become better educated to make confident decisions.
“Women say they are anxious about their finances, but they may be overcautious,” says Peter Vukanovich, President and COO of Genworth Financial Canada. “We firmly believe that learning more will help ease that apprehension.”
*Data from national omnibus online survey of 2,000 respondents conducted for Genworth Financial Canada by Environics Research from November 2007 to December 11, 2007.
**Data from national omnibus online survey of 1,500 respondents conducted for Genworth Financial Canada by Environics Research from October 17 to November 2, 2008.
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