Mar. 28, 2012
The days of the mortgage interest rates being the lowest that they have been in years, may be over according to The Bank of Montreal. The banks are advising Canadians to part with the variable mortgages and start locking into long term fixed rates while they are still low.
Financial markets have priced in an almost 50 percent chance that The Bank Of Canada governor, Mark Carney will start to increase his one percent policy setting before the year is out.
Finance Minister’s Jim Flaherty and also Mark Carney are aware of the danger to the economy because of the increasing number of Canadians’ that are becoming in debt. This is occurring because Canadians are taking advantage of the low interest rates to buy homes and or to take out home equity loans. The household debt to annual is more than 150 percent, and is also very likely to increase to about 160 percent which is the same cause that lead to the housing collapse in the United States.
Jim Flaherty expressed some frustration that the banks are calling on him to stop them from giving loans to Canadian citizens that may not be able to afford the interest rates once they start rising.
The Canada Mortgage and Housing Corporation and also the Office of Superintendent for Financial Institutions issued documents that suggest that the debt tolerance is definitely being tested.
The Bank Of Montreal economists admit that the variable rates have been the best option the majority of the time. A report shows that since 1975, the variable rate has been the most cost-efficient route 84 percent of the time. Recent rate competition has erased the fix between the five year fixed mortgage rates and variable rates.
The bond market is showing signs that the days of low interest rates may finally be numbered. The Government of Canada five year bond yields have flown more than 50 basis points in the past three months.
Although the variable rates normally follow the lead of The Bank of Canada, the longer-term rates are greater influenced by the bonds. A higher bond increases the cost of funds for lenders who pass them on to customers. Even if variable rates take time to climb, we probably won’t be seeing low fixed interest rates again for awhile.
The report gives a number of reasons for locking in interest rates. One reason being that householders will receive certainty on how much they will be paying for the next five years without the worry of what will happen to the interest rates. It’s a lift of weight of householder’s shoulders.
Staying with a variable mortgage is that historically burrowers have saved money and interest rates are unlikely to rise rapidly.
In conclusion the interest rate outlook predicts a major advantage for those choosing a fixed rate. The decision is all on the individual, but a low interest rate put together with a 25-year amortization would strengthen a burrower’s financial stability.
Currently CMHC is tightening the criteria needed for self-employed borrowers to get mortgage insurance. Those changes came into effect on April 9, 2012.
Borrowers who apply under CMHC’s self-employed stated income product will need a 10 per cent down payment instead of the five per cent down payment for purchasing of their 1st house or condo. As many people are buying condos in Thornhill and townhouses in Thornhill Woods and Thornhill Valley for investment, for second property they will need 35% (in some banks 25%) down payment.
Those changes definitely had an impact on the real estate market. We still see Thornhill homes selling like doughnuts in multiple offers (being in right location, good condition and listed for a reasonable price of course) but Thornhill condo madness is slowing down. They are sitting longer on the market and don’t get as much buyer’s attraction as they used to even two or three month ago.