3 May

FIXED RATES ARE ON THE RISE. ARE YOU READY?

General

Posted by: Charla Adrian

1 MAY 2018

FIXED RATES ARE ON THE RISE. ARE YOU READY?

With the Bank of Canada holding rates steady this April, the same is not the case for the bond market, which impacts fixed rates.
In every interest-rate market there are many factors leading to and increase and we are hoping to provide a little bit of clarity on what is happening and what it means to you and your loved ones.
At this time, we see fixed rates increasing as the bond market increases, and our economists anticipate two more Bank of Canada increases of prime rate by the end of 2018.
Why do we note this information and how does it relate to you?

If you are in a variable rate, you will want to:
1. Review your lock-in options. Knowing it’s unlikely the prime rate will reduce and fixed rates are on the rise, there could be a sweet spot to review your options now.
2. If you decide not to lock in, it’s time to review your discount to see if a higher one can be obtained elsewhere.

Locking in won’t be for everyone, especially if you are making higher payments and your mortgage is below $300,000, which most people fit and will continue on that path. Locking in will be up to a 1% higher rate than you are likely presently paying.
If however rates raising another 50 basis points this year and knowing you can likely lock in below 4% now is most attractive to you, this may be your time. The next announcement from the BOC on Prime Rates is May 30th 2018

If you are in a fixed rate:
1. If you obtained your mortgage in the last year, stay put.
2. If you are looking to move up the property ladder or consolidate debt, get your application in to us ASAP so we can hold options for up to 120 days.
3. If you are up for renewal this year or know someone who is, secure your options now with us as we keep a watchful eye on the market.

Please reach out to a Dominion Lending Centres mortgage professional so we can help ensure you or a loved is on the right path in our ever changing market.

Angela Calla

ANGELA CALLA

Dominion Lending Centres – Accredited Mortgage Professional

2 May

WHAT DOES A “RATE HIKE” ACTUALLY MEAN?

General

Posted by: Charla Adrian

2 MAY 2018

WHAT DOES A “RATE HIKE” ACTUALLY MEAN?

TD Bank has increased it’s posted rates and RBC did the same on Monday. This increase, from 5.14% to 5.59% at TD, is the “biggest move in years.” The change came because of the bond yields increasing. We do expect every other lender to follow suit.

But, actual interest rates have not changed… so what exactly is going on?

The banks have specifically increased something called the “posted” rate.

A “posted” rate is used for three purposes:

  • Fools clients into thinking rates are higher than they are by being displayed in the “Rates” section of a bank’s website.
  • A ~5% decrease in affordability for many borrowers. The posted rate is the benchmark rate that lenders use for qualifying a mortgage (a bank’s “stress test”).
  • It is used to calculate the bank’s mortgage penalty.

First, let’s address the clients who renew their mortgages when the banks send out renewal letters…

Did you know that 80% of homeowners renew with their current mortgage lender? Did you also know that the Bank of Canada published a study that says:

“Lenders have improved their ability to price discriminate… offering discount rates to different sets of consumers, based on their willingness to pay.”

Lenders know that at renewal, most clients do not shop around as they did when they obtained their initial mortgage, and are therefore less likely to offer their best rate to current borrowers.

So, this higher rate is for people who don’t know better. Please remember that the banks are not there for your client. A recent CBC article shows that the banks are there to make money first and provide advice second.

Second, for qualification, the lenders go by their “posted rate” to qualify a mortgage. If a client gets a variable at 3%, the lender is required to qualify them at the higher rate of posted/benchmark and 2% above their contract rate (in this case, 3%). However, with lenders increasing their posted rates, the client will have to be approved at 5.59% instead of 5.14%. This will affect home buyers and decrease affordability by about 5%.

Third, banks use the posted rate for their penalty calculations. The higher the posted rate, the higher someone’s potential penalty is when they pay out their mortgage. This increase in the posted rate will increase people’s penalties quite substantially for Bank Interest Rate Differential (IRD) penalties. This is definitely not in the clients’ best interests. A borrower could do much better by going with a variable rate penalty or a monoline IRD penalty.

BONUS: OK, so we now know that the Posted Rates have increased. What we don’t know is why…

The first reason for a lender to increase their rates would be when the bond yields increase. We have seen a slight increase but not that much, and definitely not enough to warrant such a high increase in a bank’s posted rate. Generally, when the bond market changes, the discounted rates will change. Discounted rates are the rates that clients actually see when they get their mortgages.

One sentiment is that TD and RBC are trying to warn people to lock in now so they can make more money and have greater “spreads” between the bond yields and mortgage rates.

If I had a crystal ball, or if I was a portfolio manager, I may have more info for you here… Alas, this is all I can say on this matter. If you have any questions, contact a Dominion Lending Centres mortgage professional who can help.

Eitan Pinsky

EITAN PINSKY

Dominion Lending Centres – Accredited Mortgage Professional
Eitan is part of DLC Origin Mortgages based in Vancouver, BC