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Ryan Zupan
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Vancouver, BC
V6H 1G7
604.250.6122
City Wide Mortgage Services – Zupan Mortgage Services (E, & O, E.).
Bank of Canada Rate Announcement: UNCHANGED
/in bank of canada, Rate Accouncement /by adminGoooood morning & welcome back from summer,
A LOT has happened. First thing’s first: the Bank of Canada held rates steady this morning but the expectation is that will only last until Oct or Dec at the latest before hopping on the rate drop train.
Global momentum has slowed & commodity prices have drifted down accordingly. The trade war has escalated over the summer & is now turning into a currency war. It’s something like ¼ of all government bonds, $15 TRILLION dollars worth, are negative yielding. Take a moment to consider what that really means.
Bonds have traditionally been where you place money for safety. A negative yielding bond means you are PAYING for the privilege of lending a government money. Think about that. You are guaranteed to lose money if you carry the bond to maturity. This is bananalands. What happened to save your money & be rewarded by having more tomorrow than you’ll have today? What are the implications when you lose money keeping it in what has traditionally been the safety trade? It’s very difficult to wrap your head around how backwards this has become & what impacts this is going to have to the world. Central banks are losing the fight against deflation.
The Bank of Canada expects economic activity to slow in the second half of the year. From what I’m reading, the US needs to drop 50bps at their next meeting & I’ve read as much as 100 bps by the end of the year. That is going to put pressure on Canada to start heading in the same direction. That all sounds great on the mortgage front but when you consider that central banks traditionally need 5% worth of rate cuts to pull an economy out of a recession & we’re a hair under 2%, it’s worrisome to imagine how this is going to end.
I love talking about this stuff so if you have any questions please get in touch. Otherwise, have a lovely day.
Here is a link to the Bank of Canada release: https://www.bankofcanada.ca/2019/09/fad-press-release-2019-09-04/
Housing Highlights From Federal Budget 2019
/in Misc., real estate /by adminThe federal budget came out yesterday & there were some minor actions targeted to first time buyers I wanted to highlight.
First off, don’t get excited. The impact in Vancouver is likely going to be limited, but basically the gov’t is increasing the home buyers plan RRSP withdrawn from $25k to $35k, effective immediately. Note that the funds still need to be repaid in the same 15 year window.
The second incentive is from CMHC which will provide 5% of a first time buyer’s down payment on a resale property & 10% on a new build. The buyer still needs at least 5% down, but this will help reduce borrowers mortgages to lower their payments.
The loan is interest free so from that perspective, why not take it. Lower payments, less interest. The funds will be repaid upon the sale of the home, but so far it is unclear how this would work exactly. CMHC might share in the capital gain or loss, receiving a portion of the sale price, but we will wait to see how this will be rolled out exactly.
There are requirements to meet this program, namely:
-household income under $120k
-borrowers must have the min 5% down
-the purchase price cannot exceed 4 times the buyers household income.
Based on this, the effective limit on purchases will be less than $500k so the impact of this is going to be limited in our market.
While the budget does allocate $10billion over 9 years for new rental homes, it does not bring in any tax breaks or reduced red tape to developers, which, in my view is a more productive & efficient way to attack these issues, but, hey, I’m not running the country!
Should you lock in your variable rate?
/in fixed vs variable, mortgage advice /by adminToday we’re going to talk about variable rate mortgages & whether you should lock in. Earlier this week I put out a blog which dove into fixed versus variable & outlined some of the key factors which could impact rates one way or another. We also looked at what history suggests is the best strategy, so for anyone who wants to take a bigger bite out of this, I’ll link to that in the show notes below but this video is going to build off that & give some practical questions to ask yourself if you’re debating whether to lock in your variable.
When ppl talk about fixed vs variable, you’ll often hear them saying a fixed rate mortgage is for the risk averse, as you know exactly what your payments are going to be for the length of your term. In reality, though, the biggest downside of a fixed rate mortgage is the penalty. If you break the term, which happens to the vast majority of borrowers, there is a penalty attached & on the fixed rate side the penalties have the potential to be much much much higher than with a variable. Given that most ppl end up breaking their term & paying that penalty, taking a fixed rate comes with more downside risk than a variable & when you consider that the variable has outperformed the longer term fixed rates close to 90% of the time, the variable actually seems to have much less risk than a fixed. If you’re in a variable currently, keep this in mind. The decision of whether to lock in should weight the probability of potentially breaking the mortgage just as heavily, if not more heavily, than concerns of rising rates.
Moving on, if you’re 10000% certain you will not be breaking your mortgage & therefore are not concerned with penalty risk, the question of locking in really boils down to your own piece of mind. If talk of rates rising keeps you up at night, or if your budget is tight & increases to your payment are going to but strain on your finances, then the first thing you want to do is contact your lender & ask what your options are to lock in. Compare the difference in payment & see what your buffer is – how many Bank of Canada increases would it take before that variable catches up to the fixed? If one increase is going to bring you to par, then that decision is going to be easier than if it would take 3 increases. Compare the risk & reward. Think of it as an insurance policy against rates really taking off.
With all this said, I’d like to again point out that history suggest locking in a variable isn’t a great idea from an overall cost of mortgage perspective. You’re better off just riding it out. For more info on that, again I’d recommend reading the blog I put out earlier this week, or feel free to give me a shout.
Ryan Zupan
Mortgage Planner
DLC City Wide Mortgage Services
604.250.6122
Should you lock in your variable rate mortgage?
/in bank of canada, fixed vs variable, mortgage advice /by adminThe past 8 months have seen the most rate increases by the Bank of Canada in over a decade.
Amidst worries of inflation finally starting to creep in with our American neighbors, and concerns that, after 35 years of declining rates, this long term declining rate trend may finally be reversing, the question of whether to lock in that variable rate that has done so well for borrowers has become a valid concern. In this blog we’re going to give some perspective to these rate increases, outline reasons for & against future increases & discuss the questions you should ask if considering locking in your own mortgage.
We are currently just off the basement of a multi decade long term trend of declining interest rates, which began in 1981 when prime rate dropped from its high of 21.25%. Since then, the overall course has been down & we have hit historical lows for interest rates in what has been an unprecedented experiment in central bank policy. In fact, over the 5000 years of interest history, the world is at the lowest level ever recorded. From that perspective, one would assume we’re closer to the end of this long term cycle than the beginning, but the question is what is going to happen in the near term.
Central bankers use interest rates as the levers of the economy
– lowering rates incent borrowing which leads to spending & investment, while raising rates are used to slow the economy & reel in inflation. While Canada had a far better year than expected in 2017, we are facing some major headwinds to overcome in the year ahead. For one, rising rates slows housing, which has been a big driver of the economy to this point. Higher rates can also strengthen the loonie, which negatively impacts exports & therefor manufacturing.
There is also the overall indebtedness of Canada to consider. Too many rate increases too quickly can effect repayment of loans & put Canadians under water on their debts. Additionally, NAFTA renegotiation & the lowering of the corporate tax rate in the States (making Canada less competitive) are two other pressing concerns for our economy. Overall, there is anything but an assured path to aggressive tightening of interest rates in the short term.
To get a sense for where rates might be heading, we can look to the yield curve.
The yield curve plots short to long dated government bond yields (interest rates are priced off of these bond yields). A normal shaped yield curve is upward sloped & indicates investors expect longer maturity bond yields to be even higher in the future. Despite the short term yields rising roughly 1% over the last year in Canada, long dated bond yields have barely moved. The yield curve is still relatively flat, which suggests investors are not optimistic for long term growth & therefore skeptic to see higher interest rates.
The best research on fixed versus variable has come from York University professor Dr Moshe Milevsky. He found that borrowers were better off taking a variable rate over a longer term fixed rate nearly 90% of the time. Fixed rate borrowers pay for stability, while those with a higher risk tolerance, who can handle fluctuations to their payments, would benefit from that uncertainty by paying less interest. Years later he updated his study to determine if borrowers would be better off trying to time the market & lock in their variable mid-term. Even under the generous & unrealistic assumption that borrowers would be able to accurately forecast the future of interest rates, he found that individuals who attempted to lock in & time the market underperformed (83.3%) those who stuck with the variable (88.1%) & rode out their term.
Accurately predicting interest rates is one of the hardest things to do in all of finance.
You could be right in timing the bottom of this 36 year trend within 5% & still be off by 22 months. Given that fixed rates are priced off bond yields, and that the bond market has generally priced in increases by the Bank of Canada before they have happened (meaning fixed rates will go up before you’ll hear talk of prime rate increasing), don’t bother trying to time the market. Take a fixed term mortgage & sleep easy knowing exactly what your payments will be for the coming term, or take the variable & don’t worry about the impossible task of trying to time the market. Choose a path & stick with it.
What is the new mortgage stress test in Canada?
/in Misc. /by adminEffective Jan 1 the newest mortgage rule was put into effect in Canada – the “stress test.” This video is going to give some background on mortgage stress tests, then explain the new rule.
Currently, if a borrower is buying with less than 20% down payment & is therefore getting an insured mortgage, they already have to qualify off of a stress test rate (being the 5 year posted rate, currently at 4.99%). For borrowers with 20%+ down, they can avoid this same stress test ONLY if they take a 5 year fixed mortgage (or longer), which means that if they want a variable or, say, a 2 year fixed, they would have to qualify off the 5 year posted rate not their actual interest rate.
The new requirement specifically impacts borrowers getting uninsured mortgages, which you can think of as borrowers with 20% down or more. Now, they will have to qualify for their financing based off a new stress test being their interest rate + 2%. So if they chose, say, a 5 year fixed mortgage with a rate of 3%, they would have to qualify based off a rate of 5%.
The irony of all this is that shorter terms generally mean lower rates, which therefore means that borrowers will qualify for larger mortgages taking shorter terms & shorter terms result in a borrower being more vulnerable to interest rate increases which doesn’t exactly benefit clients.
If you’ve bought a presale prior to these new rules being implemented & are curious how this will impact you, as long as you have a purchase contract dated prior to Jan 1, 2018, you’ll be grandfathered under the previous rules.
Additionally, you have a mortgage coming up for renewal & are not able to qualify to switch under the new rules, all is not lost. There are ways we can still qualify you off the previous rules.
If you’re looking to buy a place but can’t qualify for the price point you need under the new rules, give me a call. There are a still a few ways we can still get you into a purchase qualifying of your contract rate.
Ryan Zupan
604.250.6122
ryan@citywidemortgage.ca
My Predictions For Impacts of New Mortgage Stress Test
/in Mortgage Rules /by adminThe new year has arrived & with it, a fresh round of mortgage rule tightening. The new restriction comes in the form of a “stress test” & applies to new mortgages with equity of 20% or more. Qualifying for these mortgages will now have to be done at a rate that is 2% higher than your contract rate.
Previously, a stress test was already in place for all insured mortgages (purchases with less than 20% down), as well as borrowers with uninsured mortgages that took a fixed term shorter than 5 years or a variable rate, meaning that if a borrower with 20% or more down chose a 5 year fixed, they could qualify for the mortgage based off their actual interest rate. Under the new rules, that will no longer be possible through major lenders.
Oddly enough, the new stress test can actually end up being more restrictive than that imposed on insured mortgages. A borrower with the bare minimum down payment of 5% has to qualify for their mortgage based off the 5 year posted rate (4.99%), whereas a borrower with a down payment of, say, 50% who takes a 5 year fixed rate of 3.2% would have to qualify based off the stress test rate of 5.2% (3.2% + 2%). The borrowers impacted by this change will qualify for maximum mortgage sizes of roughly 25% lower than under the previous rules.
My prediction is that the new stress test will actually end up making condos in Vancouver even more expensive, while also driving borrowers to shorter term mortgages & ironically making them more vulnerable to the interest rate fluctuations this was designed to protect them from.
People are always going to want to own property in Vancouver. If borrowers are qualifying for mortgages that are 25% lower, many are still going to want to buy, but will just have to look at lower priced property. Residents of Vancouver have seen the price of property accelerate at warp speed. The FOMO is real & many will be approaching this as a final opportunity to own in Vancouver, regardless of the size of place. This will funnel demand into the lower price points. Those who are no longer able to buy in the price point they want will continue to rent which will keep pressure on the rental market. Both of these would suggest condos are going to end up becoming even more expensive than they are currently.