Interest Rates Should Be Decreasing…

It’s December 2018 and Interest Rates should be Decreasing.
We also address some Stress Test Rumours.

Originally written yesterday and sent to our realtor, financial planner, and lawyer partners.

Current Interest Rates and Rate Commentary

The vast majority of mortgage brokers are advising their clients to take the variable rate.

However, at Pinsky Mortgages, we know that every situation is different, so we’re about 50/50 variable vs fixed. In many cases though, the fixed may be a better choice if the rates can be at 3.54% or better (insured and insurable). However, for most uninsurable mortgages (read 30 years amortization, $1M+ homes, or rental properties), the variable is generally the better choice.

Interest rates will continue to increase on the variable side by at least 1 increase (0.25%) over the next year. I suspect there will be two increases in 2019. However, these increases are there “so we can lower the rates again.”

The Bank of Canada, not so secretly, stated that the increase in rates is just there so they can decrease the rates when needed. It’s very possible that we’ll be heading into a period of economic stagnation or even a recession so the ability to lower rates and promote more borrowing is something that government wants to have in their back pocket.

But, the reason why the Bank of Canada wants to continue to increase rates is to weaken inflationary pressures due to the current high economic growth and record low unemployment.

Winter and Spring Interest Rates:

You may have heard that the bond market rates have decreased significantly over the past month. Please see the graph below:

Generally, when government bond rates decrease, mortgage rates follow suit. However, the reason why interest rates have NOT been dropping is because banks/lenders are padding their pockets for a spring market. They are making more on the spreads at this time. This happens every year!

So they are making more money now in order to make less in the spring. Lenders fight for market share during the spring market and decrease their rates across the board.

If the government bonds stay low, expect to see a decrease in the fixed rates come end of January, mid February.

Even without bonds staying so low, a competitive spring market is good for borrowers and their pocket books. This has been the case for as long as I’ve been a mortgage broker.

Stress Test Rumours and Speculation

Several people called me and asked me if I heard anything about the Stress Test going away.

No, there has been no chatter on taking away the Stress Test. The Federal Liberals implemented the stress test and in order for them to take it away, it would be admitting they were wrong; that’s not going to happen.

A little background: The Stress Test was thought up when fixed rates were around 2.50%. The stress test would require lenders to qualify their clients at the qualification rate, at the time at 4.64%, or 2% higher than the contract mortgage rate.

At that time, without the stress test, an $80,000 a year income could get a home worth $550,000 with 10% down.

With the stress test, we’d be looking at a home worth $450,000 with 10% down. This is roughly a 22% decrease in affordability.

Now, when rates are at 3.89%, a $80,000/year income can purchase a $395,0000 property with 10% down. This is a 12% decrease in affordability affordability from the original stress test and around 29% decrease from the qualification two years ago.

We originally went from a qualification rate of 2.5% to 4.64% to 5.89%, all in the span of two years.

The government succeeded in slowing down the growth of mortgage lending in Canada.

In its analysis of data from credit agency Equifax, CMHC stated that Q2 2018 had 205,000 new mortgages, which was 11.9% lower than the same quarter last year.

*As an side, during the last three years CMHC has also increased their fees for borrowers from 3.15% to 4.0% on 90.01% to 95% financing and 2.40% to 3.10% at 85.01% to 90%. CMHC is not trying to be solvent or healthy, they are just trying to make more money. CMHC adds billions of dollars to the government coffers every year. CMHC is extra tax revenue… they do not need to have such high fees!

So what’s coming next?

The government does understand that there is a problem here. Although they will not get rid of the stress test, I have heard that possible remedies may be:

1. Decrease the 2% stress test to a lower amount.
2. Allow 30 year amortized mortgages on insured purchases (remember that 12 years ago we were allowed 40 year amortization).
3. There is a small possibility that transfers of mortgages from one institution to another will not require the stress test. This is due to clients being approved for a certain amount a couple years ago and now not being able to requalify for the same amount (due to the stress test). This creates a type of “prison” for the client; they must stick with their lender even if their current lender’s rates are unattractive or arbitrarily higher than the rest. Or, if their current lender does not renew their mortgage, there is sure to be fire-sales or 2nd tier mortgages provided that will be even worse for that family’s finances