A survey by the Canadian Association of Accredited Mortgage Professionals (CAAMP) says Canadians appear well prepared to face the new phase of the residential mortgage market, in which interest rates are rising and house activity is expected to ease.
The survey found:
· Consumer concern about rising rates is offset by increasing home equity.
· Many mortgages were renegotiated at lower rates; amortization periods are declining.
· Many Canadians have used cost savings from low rates to pay more than required, providing flexibility to deal with mortgage rate increases.
· Mortgage debt is a priority – the vast majority of Canadians have never missed a payment.
· A high percentage of Canadians still believe it is a good time to buy a home.
The report, entitled Prudence Paying Off For Canadian Mortgage Borrowers, is authored by CAAMP chief economist Will Dunning and based on information gathered by Maritz Research Canada in a survey of Canadian consumers conducted in April.
Canadians are positive about the housing market in their communities, but only 3.4 per cent said they were very likely to buy, suggesting activity may slow during the remainder of this year. This number is slightly lower than that of previous surveys.
Still, Canadians across the country are bullish about house prices. Almost one-half of those surveyed expect prices to rise and 44 per cent expect them to remain stable. These numbers, when tabulated with previous survey results, show the highest number of Canadians indicating they expect house values to increase rapidly. Previously, attitudes varied between provinces, but this spring, optimism is nationwide, says CAAMP.
The report simulates the impact of mortgage rate increases up to 5.25 per cent and finds that about 375,000 mortgage holders are already challenged by their current payments, and another 475,000 might be if their rate rises to 5.25 per cent. “But many borrowers are paying more than required, they already have significant equity, and they have flexibility to adjust payments in the event of future challenges,” says Dunning. “The very high percentage of Canadians who have never missed a payment confirms that Canadians take their mortgage obligations seriously.”
The survey says the average outstanding mortgage principal is $138,000 and for mortgage borrowers, the average amount of equity represents 53 per cent of the average value of homes ($297,000). Approximately 11 per cent of mortgage borrowers withdrew equity from their home in the past year, totaling $20 billion, a substantial reduction compared to the $34 billion estimate of 2009. The results indicate caution on the part of borrowers, says CAAMP.
This view is accentuated by the fact that among mortgages transacted during the past year, 65 per cent are fixed rate, 29 per cent are variable or adjustable, and six per cent are combination mortgages. Most terms are long – 70 per cent are five years or longer, nine per cent have short terms of two years or less, and 21 per cent have terms of three or four years. Significantly, of the 65 per cent with fixed rates, 12 per cent locked in from a variable rate during the past 12 months and a further 10 per cent had locked in more than a year ago in anticipation of rising interest rates, says the association.
Ninety-three per cent of mortgage holders have never missed a payment and of the seven per cent who have, four per cent did so during the past year. The survey data indicates that recent purchases and extended amortization periods are no more risky than are prior purchases and shorter amortization periods.
Mortgage holders have also been flexing their muscles – negotiating significant discounts on posted interest rates, says CAAMP. Over 80 per cent of borrowers negotiated a discount of one percentage point or more. Last year, the average five-year fixed rate was 4.10 per cent while the average posted rate was 5.57 per cent. For new mortgages taken out in the last year, 50 per cent obtained their mortgage from a Canadian bank, and 30 per cent from a mortgage broker.
“Our spring survey report reveals a remarkably mature borrower,” says Jim Murphy, president and CEO of CAAMP. “We find that Canadians have taken advantage of the low interest rates to increase their regular payments (16 per cent) and make lump sum payments (13 per cent). This planning puts them in a stronger position to weather more expensive borrowing.”
Wednesday, June 9, 2010
Tuesday, June 8, 2010
CREA lowers housing forecast as market weakens
TORONTO -- Rapidly changing market conditions have led the Canadian Real Estate Association to lower its forecast for housing sales this year.
The Ottawa-based group, which represents 100 boards across the country, now says 2010 sales will not be as strong as previously forecast and by next year prices will begin falling.
CREA expects 490,600 sales through the Multiple Listing Service in 2010, a 5.5% jump from a year earlier and the second-best year on record. However, by 2011, sales are expected to fall by 8.5%.
“The revision reflects a weaker-than-expected start to the year in British Columbia, and recent developments that pulled forward the timing as to when sales are expected to ease in other provinces,” the group said in a statement.
A major factor pushing people into the market earlier has been new mortgage rules that went into effect April 19. Canadians buying homes with mortgage default insurance must now qualify based on what is called the benchmark rate for a five-year fixed-rate closed mortgage, if they opt for terms of under five years.
The impact has been that borderline borrowers get less cash for their homes because they must qualify based on a rate that is 6% today. Consumers going for terms five years or longer can qualify based on the rate on their contract, which is as low as 4.25% for a five-year mortgage based on discounting.
The rules have forced many consumers out of variable rate mortgages tied to prime, which even after yesterday’s Bank of Canada rate hike, stood at 2.5%.
“The changes prompted some homebuyers to finance their home purchase before the new regulations took effect in April, which pulled forward a number of sales that would have otherwise taken place at a later date,” said CREA.
With the Bank of Canada on Tuesday finally increasing its overnight lending rate, which prime tracks, that too is expected to impact home sales in the coming months. “Interest rates are expected to rise slowly and at a measured pace during a new era of government spending restraint, so home financing will remain within reach for many homebuyers,” said Georges Pahud, CREA president.
CREA now says the market peaked in the fourth quarter of 2009 and predicts by next year the average price of a home sold through the MLS will be $318,300, a 2.2% decline from 2010. This year’s average price increase is now expected to be only 1.6% higher than 2009.
Average price increases were previously forecast to rise 5.4% in 2009, but the lower sales activity in British Columbia, which includes the country’s most expensive market in Vancouver, drove down the national numbers. In fact, only B.C. and Ontario are not expected to post price gains in 2011.
“With interest rates soon expected to rise, Canada is widely believed to be entering a typical demand-driven downturn due to recent prices increases and rising interest rates,” said Gregory Klump, chief economist with CREA. “A downward trend in national sales activity combined with an increase in listings will result in a more balanced market. In keeping with the return of a balanced housing market and typical demand-driven housing market cycle dynamics, prices will remain stable.”
Mr. Klump emphasized that Canada’s mortgage market remains “solid,” and that conservative lending practices mean the country will not experience the same type of correction the United States has had where prices have fallen as much as 50% in some markets.
Last month, CREA issued a report debunking the theory put forward by a number of commentators that the Canadian housing market was headed for a major correction. The report came on the heels of an analysis from Canadian Imperial Bank of Commerce senior economist Benjamin Tal that housing prices in Canada were 14% overvalued.
The Ottawa-based group, which represents 100 boards across the country, now says 2010 sales will not be as strong as previously forecast and by next year prices will begin falling.
CREA expects 490,600 sales through the Multiple Listing Service in 2010, a 5.5% jump from a year earlier and the second-best year on record. However, by 2011, sales are expected to fall by 8.5%.
“The revision reflects a weaker-than-expected start to the year in British Columbia, and recent developments that pulled forward the timing as to when sales are expected to ease in other provinces,” the group said in a statement.
A major factor pushing people into the market earlier has been new mortgage rules that went into effect April 19. Canadians buying homes with mortgage default insurance must now qualify based on what is called the benchmark rate for a five-year fixed-rate closed mortgage, if they opt for terms of under five years.
The impact has been that borderline borrowers get less cash for their homes because they must qualify based on a rate that is 6% today. Consumers going for terms five years or longer can qualify based on the rate on their contract, which is as low as 4.25% for a five-year mortgage based on discounting.
The rules have forced many consumers out of variable rate mortgages tied to prime, which even after yesterday’s Bank of Canada rate hike, stood at 2.5%.
“The changes prompted some homebuyers to finance their home purchase before the new regulations took effect in April, which pulled forward a number of sales that would have otherwise taken place at a later date,” said CREA.
With the Bank of Canada on Tuesday finally increasing its overnight lending rate, which prime tracks, that too is expected to impact home sales in the coming months. “Interest rates are expected to rise slowly and at a measured pace during a new era of government spending restraint, so home financing will remain within reach for many homebuyers,” said Georges Pahud, CREA president.
CREA now says the market peaked in the fourth quarter of 2009 and predicts by next year the average price of a home sold through the MLS will be $318,300, a 2.2% decline from 2010. This year’s average price increase is now expected to be only 1.6% higher than 2009.
Average price increases were previously forecast to rise 5.4% in 2009, but the lower sales activity in British Columbia, which includes the country’s most expensive market in Vancouver, drove down the national numbers. In fact, only B.C. and Ontario are not expected to post price gains in 2011.
“With interest rates soon expected to rise, Canada is widely believed to be entering a typical demand-driven downturn due to recent prices increases and rising interest rates,” said Gregory Klump, chief economist with CREA. “A downward trend in national sales activity combined with an increase in listings will result in a more balanced market. In keeping with the return of a balanced housing market and typical demand-driven housing market cycle dynamics, prices will remain stable.”
Mr. Klump emphasized that Canada’s mortgage market remains “solid,” and that conservative lending practices mean the country will not experience the same type of correction the United States has had where prices have fallen as much as 50% in some markets.
Last month, CREA issued a report debunking the theory put forward by a number of commentators that the Canadian housing market was headed for a major correction. The report came on the heels of an analysis from Canadian Imperial Bank of Commerce senior economist Benjamin Tal that housing prices in Canada were 14% overvalued.
Sunday, June 6, 2010
How mortgage rates are set
The Bank of Canada raised short-term interest rates this week, and more increases are expected later in the year, prompting many home buyers and mortgage holders to ask whether a variable-rate mortgage or a fixed-rate mortgage is best for them.
How, exactly, are mortgage rates offered by lenders determined? Many Canadian mortgage holders are surprised to learn that the pricing for variable-rate and fixed-rate mortgages are determined by two different means.
First, let’s look at the pricing of variable-rate or “floating rate” mortgages. The rate for these mortgages is tied directly to the prime rate, which is set by the Bank of Canada, usually through regularly scheduled announcements. Very competitive variable rate mortgages are now commonly available.
“Those with variable rate mortgages need to keep an eye on the prime rate,” says Margaret Dron, a mortgage broker with Invis, “and should keep in contact with a mortgage professional, who can explain interest rate trends.”
Pricing for fixed-rate mortgages follows a separate dynamic and is a bit more complex. Fixed-rate mortgages are priced in relation to the bond markets, as bonds are the main competing investment to mortgages for investors. Mortgages are priced higher than bonds, usually between about 1.2 per cent and 1.9 per cent, to account for higher risk of default and administration costs incurred by investors who hold mortgages as opposed to relatively hassle-free bonds.
The most popular type of mortgage in Canada is currently the five year fixed-rate mortgage. Discounted rates for this type of mortgage (available through a mortgage broker) have been trending upwards in recent weeks.
“With rates for both variable and fixed mortgages relatively low, consumers must decide based on their own preferences and unique circumstances,” says Dron, “A mortgage broker can help consumers evaluate their mortgage options and make an optimal choice.”
Jun 2, 2010
Article by Margaret Dron
How, exactly, are mortgage rates offered by lenders determined? Many Canadian mortgage holders are surprised to learn that the pricing for variable-rate and fixed-rate mortgages are determined by two different means.
First, let’s look at the pricing of variable-rate or “floating rate” mortgages. The rate for these mortgages is tied directly to the prime rate, which is set by the Bank of Canada, usually through regularly scheduled announcements. Very competitive variable rate mortgages are now commonly available.
“Those with variable rate mortgages need to keep an eye on the prime rate,” says Margaret Dron, a mortgage broker with Invis, “and should keep in contact with a mortgage professional, who can explain interest rate trends.”
Pricing for fixed-rate mortgages follows a separate dynamic and is a bit more complex. Fixed-rate mortgages are priced in relation to the bond markets, as bonds are the main competing investment to mortgages for investors. Mortgages are priced higher than bonds, usually between about 1.2 per cent and 1.9 per cent, to account for higher risk of default and administration costs incurred by investors who hold mortgages as opposed to relatively hassle-free bonds.
The most popular type of mortgage in Canada is currently the five year fixed-rate mortgage. Discounted rates for this type of mortgage (available through a mortgage broker) have been trending upwards in recent weeks.
“With rates for both variable and fixed mortgages relatively low, consumers must decide based on their own preferences and unique circumstances,” says Dron, “A mortgage broker can help consumers evaluate their mortgage options and make an optimal choice.”
Jun 2, 2010
Article by Margaret Dron
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