FED POINTS TO RISING CONFIDENCE LEAVING RATES UNCHANGED

The Federal Open Market Committee (FOMC) reiterated in their press release today that the labor market is strengthening and the economy continues to expand at a moderate pace. The consumer is doing most of the heavy lifting as business investment remains soft, but both business and consumer confidence is rising. Inflation has ticked up, but remains below the Fed’s 2 percent long-term objective. Inflation expectations are stable.

Given the Fed’s expectation that labor markets will improve “somewhat further,” economic growth will be moderate and inflation will rise to 2 percent over the medium term, the Committee decided to maintain the target range for the overnight federal funds rate at 1/2 to 3/4 percent as expected.

As always, the Fed will monitor both domestic and international developments to assess the timing and size of interest rate hikes in the future. According to the Fed’s Monetary Policy Report in mid-December, most members of the FOMC expects three rate hikes this year. At the moment, the market does not envision the next hike until May or June.

The Committee believes that monetary policy is accommodative and given low inflation, members believe that only gradual interest rate increases to levels below their assessment of the long-term normalized rate is warranted. Most members of the policy Committee estimate that the longer-term federal funds rate is likely to be 2-3/4 to 3.0 percent. It will likely be a few years until the funds rate returns to this level.

Some have been concerned about the level of bond holdings on the Fed’s balance sheet arising from the quantitative easing in the wake of the financial crisis. The Fed purchased bonds in the open market to stimulate economic activity during the Great Recession. Today’s policy statement restated that the Fed will maintain its existing policy of “reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions”.

No doubt President Trump will be happy with today’s Federal Reserve decision. He had accused the Fed during the election campaign of being politically motivated in keeping rates steady. There is some concern that the Trump administration might threaten the independence of the Fed, in direct contrast to historical presidential policy.

The new administration has created a good deal of uncertainty with respect to the size and timing of tax cuts, spending increases and regulatory rollbacks, which should boost growth and inflation.

Until recently, longer-term bond yields shot up following the results of the presidential election. Markets are expecting sizable fiscal stimulus. The post-election jump in borrowing costs filtered through to a rise in mortgage rates in both the US and Canada. In the US, steady growth in jobs, wages and the economy will continue to underpin home purchase.

In Canada (and the US), the supply of available properties is at historic lows, driving up house prices, especially in the Greater Toronto Area. With the Fed projecting three interest-rate increases this year, further increases in mortgage rates could put houses out of reach for more buyers. This, despite the Bank of Canada remaining on the sidelines.

Given the federal government’s regulatory actions to slow the housing market, higher mortgage rates driven by US rate hikes is likely to be a welcome development in Ottawa, even though it certainly does not make housing more affordable.

Written By Dr Sherry Cooper, Chief Economist, Dominion Lending Centres

A CONVERSATION ABOUT MORTGAGE PRE-APPROVALS

Thinking of buying a property, but don’t know where to start? Well… that’s where a mortgage pre-approval comes in. Start here. Just like you wouldn’t go into a restaurant without having enough money to buy your meal, so you shouldn’t start shopping for a home without an understanding of how much you can afford. So let’s have a conversation about a mortgage pre-approvals so you can get this house hunting party started.

Although a pre-approval is the best way to get started, we have to be honest about what a pre-approval is and what it’s not.

NOT MAGIC. NOT BINDING.

Let’s start at the beginning and dissect the word pre-approval. Pre means before, in advance of, or prior to, and in this case means before the approval. A pre-approval is not an approval, let me say that again (in italics) for emphasis, a pre-approval is not the same as an approval. It’s not a guarantee of financing. it’s not magic, and unfortunately it’s not binding. There are a number of factors that come into play after the pre-approval is in place that can derail your dreams of homeownership.

• as a mortgage approval requires a property to be scrutinized, and a pre-approval doesn’t look at any property, it can’t be guaranteed.
• as your employment status can change after a pre-approval, all employment documents have to be verified as part of the approval process.
• a secondary credit report can be pulled by the lender or insurer after the pre-approval is in place, if there are discrepancies, they could decide not to proceed with financing
• mortgage rules can change and sometimes come into effect with no grandfathering.

SO WHAT GOOD IS A PRE-APPROVAL THEN…

A pre-approval is simply a formalized gathering of your ducks, and putting them in a row. It won’t guarantee you will get the mortgage, but it will certainly uncover any major obstacles that might be in your way. Consider a pre-approval a pre-screening, where we take a look at your employment, credit history, and your downpayment, and figure out the maximum mortgage amount you can qualify for. We will also have a look at all the mortgage options available to you on the market, so you can decide in advance what product meets your financing needs.

Obstacles, like what? Well, the truth is, you only know what you know, said in another way, you don’t know what you don’t know. Did you know that they figure about 10-20% of credit reports have some kind of error on them. By taking a look at your credit report as part of the pre-approval process (instead of when you have already found the house of your dreams), you have time to fix any errors before hand. This might not sound like that big of a deal, but it could be the difference between getting financing or not.

A pre-approval usually comes with a rate-hold, this is a good thing. Rates are like gas prices, they fluctuate and go up and down from time to time. As part of taking a preliminary look at your mortgage application, lenders will typically offer a rate hold for 90-120 days on a specific mortgage term. This means that if you find a property to buy in the allotted time, even if rates have gone up in the mean time, you will get the rate that was guaranteed. What happens if rates go down, well… you get the lower rate. It’s a win win.

IT’S A PROCESS

Buying a home is a process, a process that has a lot of steps that come into play. A pre-approval is one of the first steps you take. A pre-approval allows you to collect all your documentation ahead of time, handle any obstacles that may come up, have a look at your mortgage options, secure a rate hold, and will give you piece of mind as to the next steps in the process. Regardless if this is your first time buying a place or your twentieth, a pre-approval is the best place to start. Even if it doesn’t guarantee you will get the mortgage in the end.

So if you are thinking about buying a home, let’s get started, as we would love to help you secure a pre-approval. And if for some reason you are faced with some obstacles, we will help you get on track. Contact a Dominion Lending Centres mortgage professional today!

FIXED VS VARIABLE RATE MORTGAGE – WHAT’S THE BETTER CHOICE AND WHY?

In today’s market, variable and fixed rates are not too far apart. This makes most people think that the fixed rate is the way to go as it’s often viewed as the safest option.

Many believe that variable rate mortgages are for the daring and at any time your rate could double leaving you high and dry in the cash flow department. Many don’t realize that isn’t the truth at all.

The great thing about a variable rate is you have the option to lock into a fixed rate at any time you start feeling panicky, but I can assure you your interest rate will not be doubling over night. Even if your rate did go up by .25% the savings you would have already earned would put you on level playing ground, or you’d possibly still be in the lead.

Over the last 40 years variable rate mortgages have proven themselves to be the better choice for saving money and flexibility. I would also say that you’ll be given ample warning in the news and media that the Bank of Canada is planning a move on rates. When the rate does increase, I’m certain it will be slowly creeping up with just a quarterly rate increase at a time.

Where you’ll save the most money choosing a variable rate compared to a fixed rate is with the penalty.

With a variable rate, you’ll only ever be charged 3 months interest at any given time you choose to break your mortgage during the term. With a fixed rate it’s always the greater of Interest Rate Differential (IRD) or 3 months interest, and believe me those IRD penalties can be insanely large!

Statistics show that the majority of Canadians break their mortgage before the 5 year term is up, so save yourself some dough and consider going variable. There’s more to it than just the lower rate…and we here at Dominion Lending Centres can show you many mortgage options to fit your specific needs.

HOW A DLC MORTGAGE BROKER CAN REALLY HELP YOU!

While it’s certainly easy to be intimidated by the prices that you might see as you browse MLS into the wee hours of the night, mortgage interest rates are still at a historical low.  If you’re looking at purchasing for the first time, you’re thinking, “What does that mean?!”

With rates as low as they are, the cost of borrowing associated with your mortgage is lower than ever before.  You also need to look at other fees that can be tied to different mortgage products.  For example, some mortgages don’t allow for additional or increased payments, while others allow you to pay down your principal mortgage amount by up to an additional 20% per year, saving you money over the lifetime of your mortgage. It’s important to recognize and understand these options and fees, and that is where a Dominion Lending Centres Mortgage Broker comes in.  Brokers and their agents are experts in the products that they offer and will work to save you the most money.

Don’t worry!  A Broker can also help you take advantage of low interest rates as a homeowner, too!  It could be the right time to look at your other financials and consider consolidating other outside debts to take advantage of the savings that could be available to you.  It isn’t hard to see the savings between a balance owed on a credit card at 19% or the balance owing on your car at 6.25% and consolidating one (or both!) with your mortgage balance at much lower interest rate.  A broker can look at your current mortgage terms and timelines and can help you save a considerable amount of money each year!

A Mortgage Broker’s service doesn’t stop there.  Since the demand for new homes is so high right now, a Mortgage Broker will also help both first-timers and home-owners peeking around the markets with a pre-approval before you start considering making an offer on a new home. This means that you can confidently make an offer on the home that you love without making a condition on financing.  In a busy market, where purchases often end in bidding wars, having your financing in line could make your offer stand out against the rest.

Since properties are being scooped up like hotcakes, homeowners can also take advantage of selling their homes to downsize and save for retirement, or vacations, or spoiling their grandkids!

Now if you’d rather “love it” than “list it”, you can benefit from today’s high demand, too!  If you have been thinking about adding that basement bathroom, or are in need of upgrading your furnace and air conditioning units, a Broker can help you take advantage of the equity that you have gained in your home since you bought it.  In the last year, the demand for homes has soared, which means that your home could be worth a good chunk more than you might think.  Regardless of if your mortgage is up for renewal or not, a Mortgage Broker can help you make sense of the mortgage that you’re in, and look at payout options that could work in your favour.  And a mortgage evaluation will always be free with a licensed Broker.

Today’s market has a lot of characteristics that can work in your favour, but can also throw a little wrench in your plans.  Always make sure to sit down with a licensed, local Dominion Lending Centres’ Broker to make sure you’re armed with the knowledge that you need to get the most for your money!

SUMMARY OF THE NEW MORTGAGE MARKET

There have been a lot of changes in the mortgage market over the past few months so many Canadian’s plans regarding homeownership may have shifted quite a bit from last year.

First, new qualification rules came to pass in October where even though actual contract rates are sitting at about 2.79% all Canadians have to now qualify at the Bank of Canada Benchmark rate of 4.64% to prove payments can still be met when rates go up in the future. That has taken about 20% of people’s purchase power out of the equation.

The second round of rules were implemented at the end of November with the government requiring banks to carry more of the cost or lending having to do with how they utilize mortgage insurance and the level of capital they have to have on reserve. This means it is more costly for banks to lend so they are passing some of that cost to Canadians.

We now have a tiered rate pricing system based on whether you are “insurable” and meet new insurer requirement to qualify at 4.64% with a maximum 25-year amortization (CMHC, Genworth, Canada Guaranty are the 3 insurers in Canada) or are “uninsurable” where you may have more than 20% down but can’t qualify at the Benchmark rate or need an amortization longer than 25-years to qualify or are self-employed so can’t meet traditional income qualification requirements. Canadians who are uninsurable will be charged a premium to their rate of anywhere from 15-40bps. So your rate would go from 2.79% to 2.94% at the very least.

Then in BC there was the announcement of the BC HOME Partnership Program (BCHPP) in January. We have finally had some clarification on how this works but the benefits are not as grand as the BC Government would like them to appear.

The BCHPP is a tool to assist First Time Homebuyers supplement their down payment by the government matching what they have saved up to 5% of the purchase price. While this may help some clients bring more money to the table we have to factor a payment on that “loan” into the debt-servicing mix so they will actually qualify for less by way of a mortgage. They have more down payment but can not get as high a mortgage so it’s very close to a wash.

Lastly, as of mid January, CMHC announced they are increasing mortgage insurance premiums on March 17th. Genworth and Canada Guaranty are likely to follow. The insurance premiums are based on a percentage of the mortgage amount requested and how much you have to put down. For people with 5% down the premium will go from 3.60% to 4.00% and if you want to take advantage of the BCHPP program the premium will go from 3.85% up to 4.5%

What does this all mean? Overall it is more costly and more confusing to get a mortgage today than we have seen in many years. With the complexity of the new mortgage market, now more than ever buyers need someone with extensive knowledge to help them sort through their options – such as your local Dominion Lending Centres mortgage professional.

If we can be of assistance to you or someone you know, please do not hesitate to contact us.

https://www.bchousing.org/housing-assistance/bc-home-partnership

This program offered by the BC Government is proven to be interesting and has its draws and definitely its drawbacks.  Please contact me for further details!