Interest Rates on the way up... Early?

Media sources have reported that Mark Carney governor of the Bank of Canada has indicated that inflation and the economy are rebounding more quickly than expected. As reported in the Toronto Star "Higher Interest rates on way - March 25th" he has the option of hiking rates sooner than expected should the Bank of Canada feel this necessary. The Globe and Mail article "Mark Carney mindful of hotter inflation" suggested that the "Bank of Canada governor's comments increase odds of an interest rate hike within next few months.

The Bank Governor has reiterated that the committment to hold rates through June 2010 was always conditional on inflation remaining within an acceptable range. So we await the next Bank meeting on Tuesday April 20th to see if they will indeed move rates up ahead of the anticipated time.

Rates will increase the interest rate charged, and thus the interest payable, on all variable rate mortgages. Further a rate hike will put upward pressure on fixed rates. In both cases this will increase the cost of homeownership and decrease affordability.

Changes to Insured Mortgage Rules Announced

Thanks to Mary McCreath of from Mortgage Intelligence for sharing the following insights into the recent announcement by the Ministry of Finance with respect to the changes to the rules for insured mortgages. (i.e those mortgages with less than 20% downpayment.


Further to yesterday’s announcement on government backed mortgages (CMHC insured), we thought you would appreciate clarification on the changes to come on April 19, 2010.

1. Qualifying at a 5 year fixed rate.
Currently when someone takes a short term mortgage or variable rate mortgage we qualify them at a 3 year rate. With the change, we now need to qualify them at the 5 year rate. The difference in these rates (as at feb 17, 2010) is approximately 20 basis points...from 3.59 (3 year) to 3.79 (5 year). This change shouldn’t affect a buyers purchasing power in any substantial way, but will offer you a modest buffer against the cost of higher rates down the road.

2. Limitation of refinancing to 90% of the value of the home rather than 95%.
You can borrow against the equity you have in your property when you refinance, the amount you can borrow when you do that is now limited to 90% of the value of the property. This does not affect purchases as the change impacts existing home owners.

3. Discouragement of Speculation by requiring a minimum down payment of 20%.
On non-owner occupied properties only, borrowers will require 20% down rather than the 5% it has been. This change will affect clients who are buying multiple condos and homes for “flipping” if they don’t have 20 % down. It will have no impact on those who are looking to purchase a house or condo to live in.

Exceptions on these changes will be made after April 19 where they are needed to satisfy a binding purchase and sale financing or refinance that has been entered into prior to April 19, 2010. Guidelines are still to be set which will be outlined over the next month or so. Note that banks and financial institutions may opt to implement these changes in advance of the prescribed government deadline.

Your Realtor and Mortgage Broker should work to ensure you understand the implications of the choices you are making and that the options match your personal circumstances today and into the future. Be sure to identify a professional who will take the time to get to know you and your personal needs and will then help you understand the options and implications before you make decisions. If you still have questions about how these changes effect you please post a comment and we'll gladly respond.

Canadian Real Estate Bubble?

There has been a fair bit of talk of a US style real estate melt down here in Canada. The Canadian Real Estate Association reported in January a 19% increase in average prices and record sales volume for 2009. While there is no doubt that Canada's and real estate market is red hot at the moment with tight housing supply and demand fueled by low interest rates all leading to increasing prices there is in my view no similarity between the current Canadian real estate market and the very troubled American real estate market.

First a 19% average price increase is being measured from a low point based on a recessionary downturn. Secondly there is no real evidence of a speculative real estate market, and finally our mortgage practices simply don't compare to those in the United States.

Quite simply our mortgage lending practices are far more responsible and measured than those in the United States that created the conditions for their massive market meltdown. In the United States sub-prime mortgages were being approved for unqualified people who couldn't possibly hope to make payments, in addition mortgages with escalating interest rates were common place. As such those approved could pay for a year or two and then rates sky rocketed and the mortgage was no longer affordable and the ability to stay in the home was compromised. These products and practices to my knowledge do not exist in Canada.

Take pride in the fact that our regulated market helped Canadians and Canadian Financial institutions avoid the worst of the world financial melt down driven in large part by irresponsible lending practices and the sale of bogus asset backed securities in the Unites States.

All this being said thousands of Candians are buying homes at record low interest rates and each home owner must look to the future and ask the question "what happens in 3 - 4 - 5 years when my mortgage is up for renewal and rates are 2 or 3 percentage points higher?" Each of us must take responsibility and look to the future to ensure our home ownership is secure and affordable and start planning ahead for when rates are higher.

I'm am always pleased to discuss my clients personal mortgage and home ownership situation to help you ensure you've protected yourself against future changes in the market. In addition the Canadian Finance Ministry today announced changes that continue Canadian efforts to ensure responsible lending practices to avoid future problems.

Take heart, I don't beleive we are in a real estate bubble and I anticipate a soft landing for our red hot market as we anticipate increased inventory easing the pressure of the existing demand, further as interest rates rise demand will dampen to some degree. Yes there are risks if for example the sellers market continues for too long a period or speculative buying start to drive prices ever higher, however on balance i am confident in the future of the Canadian Real Estate Market.