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The Mortgage GameWith rates predicted to rise, should you lock in, or take a risk and how much should first timers spend?

With anticipated interest rate increases on the horizon, many homeowners are wondering whether to lock debt such as mortgages and secured lines of credit into a fixed-rate mortgage or stay variable. Even some who are mortgage free are concerned with how rate increases will impact secured lines of credit, the financing of vacation homes and recreational property.

First-time buyers may be particularly concerned with entering the national capital’s expensive real estate market.

What can you afford?

As a first time home buyer, it’s essential to figure out what you can afford. A quick rule of thumb is that your household expenses should not add up to more than 40 per cent of your pre-tax household income. Household expenses include mortgage payments, property taxes, condo fees, utility and heating costs, and any payments on other loans such as car loans, credit card debt and lines of credit.

Probably the first step should be to get a copy of your credit history from Equifax Canada and/or the credit bureau. As this is what lenders will look at, it’s important to review its accuracy.

Then do a household budget, list your assets and liabilities and meet with a bank or mortgage broker to get pre-approved for a mortgage. Try the monthly payments on for size. Let’s assume that your current rent is $1,000 and your anticipated payment as a homeowner is $2,350 for principal, interest, taxes, hydro, etc. Try putting aside the extra $1,350 immediately. Not only will this help you save some extra money, but it will get you in the habit of allocating this level of payment every month. Consider the maintenance costs as well, from normal upkeep to potentially larger expenses like a new roof or furnace.

It’s important to find out how much you can afford before falling in love with a house.

Start saving before you start shopping — the larger the down payment, the lower the financing costs. Although it’s not always possible for first-time home buyers, try to come up with at least a 20-per-cent down payment. Any down payments below this level must be insured with Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial — another expense to factor in.

To assist with your down payment, consider using the Home Buyer’s Plan, which allows you to withdraw up to $25,000 from your RRSP for the purchase of a qualifying home.

Work with a real estate agent familiar with the area you would like to live in, an experienced home inspector and a real estate lawyer to help draft an offer and ensure that title is transferred properly.

Mortgage options

A recent survey indicated that more than 60 per cent of Canadians expect rates to rise over the next 12 months. With this in mind, here are some mortgage strategies to consider.

Fixed rate: If the prospect of rate increases is causing you significant concern, then perhaps you should consider locking in all or some of your debt. With the inflated home equity line of credit rates that consumers have been charged (prime plus 0.5 to one per cent instead of the traditional prime), it’s not that big a jump to a five-year fixed rate, perhaps as little as one per cent more.

If your fixed-rate mortgage is renewing in 2011 and you are interested in another fixed-rate mortgage, it may be worthwhile negotiating with your lender to close out your current mortgage and move into the new lower rate mortgage without penalty. As a strategy to pay off the mortgage sooner, consider increasing the payment and utilize weekly or accelerated bi-weekly payment schedules.

If you would like some level of security but don’t want a fixed rate on all your debt, consider a blend where a portion is at a fixed rate and the balance at a variable rate.

Variable rate: There are many studies that show that despite its volatility, a variable-rate mortgage tends to save more interest in the long term.

Variable-rate mortgages are best for consumers who are financially stable and can financially and emotionally handle the day-to-day fluctuations. One strategy is to benchmark your variable rate payment to that of a five-year, fixed-rate mortgage. Not only will you apply thousands of dollars against the principal and shorten the mortgage term, you will also build a higher potential payment into your budget.

Here are other tips for a variable-rate mortgage:

• Ask for a variable-rate mortgage at below prime. You might even be able to get prime minus 0.75 per cent.

• Negotiate a better rate on your home equity line of credit. Try to get the prime rate or prime plus 0.5 per cent, as opposed to the current prime plus one per cent that you are probably paying.

• Consider moving all of your debt to a combination of these two options.

For consumers who like the variable-rate mortgage option but are concerned about rate increases, ask your financial institution to give you a 120-day rate guarantee at their best discounted five-year rate. Keep the five-year, fixed-rate guarantee as insurance if rates increase significantly and renew it every 120 days until you feel rates have stabilized.

The windsor star

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Bank of canada – holds key rate – steady eddie…..

As expected today Bank of Canada is holding the key rate for all you variable rate mortgage holders, your probably giving a sigh of relief as you can still take advantage for a couple more months with a low interest rate and no change to your payment, or you could contact me, to introduce you to the Inflation Hedge Strategy which when implemented, will protect yourself against the increase of interest rates and allows me to monitor your rates for you.  Hope for the best, plan for the worst.

Here are some of the comments from the Bank of Canada announcement today;

Parsing through the comments of Mark Carney, Bank of Canada governor, there are definite signs that the central bank is taking a firmer stance on plans to remove monetary stimulus sooner rather than later.

Here’s some highlights from the bank’s July statement:

  • The bank is now saying “some of the considerable monetary policy stimulus currently in place will be withdrawn” (emphasis ours) compared with “eventually withdrawn” in the last statement
  • Economy now forecast to grow 2.8% in 2011, 2.6% in 2012, 2.1% in 2013
  • Down slightly from April forecast of 2.9% growth in 2011
  • Forecasts for 2012 and 2013 remain unchanged
  • Headline inflation is expected to stay north of 3% due mostly to “temporary factors” including significantly higher energy and food prices
  • Core inflation is “slightly” higher than anticipated, owing in part to “persistent strength in the prices of some services”
  • Core CPI to remain around 2%
  • Total inflation expected to return to 2% target in middle of 2012
  • Economic expansion proceeding “largely” as projected
  • Canadian growth still expected to re-accelerate in the second half of 2011
  • “Growth in household spending is now projected to be slightly firmer, reflecting higher household income” relative to April projections
  • Bank forecasts “assumes authorities are able to contain the ongoing European sovereign debt crisis, although there are clear risks around this outcome”

Here’s what analysts are saying about the bank’s comments:

Avery Shenfeld, chief economist, CIBC World Markets

  • “The troubles abroad and challenges to net exports kept the bank from hiking as early as today”
  • “Signs of better growth in the U.S. and Canada in the second half would clearly be enough to tip the bank into hiking, and we should have enough of that evidence on hand by October”

Michael Gregory, senior economist, BMO Capital Markets

  • “Rate hikes don’t appear imminent (read: not likely in September), reflecting a downgraded and riskier near-term outlook”
  • “We are sticking to our call for October and December rate hikes this year”
  • “The bank is betting that the inflation profile won’t make tightening more of a lay up move; we’re somewhat more skeptical”

Bank of Canada next meet September 12, 2011.

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Bank of Canada holds key rate

Widely predicted by economists, forecasters, banks and average people nationwide, Mark Carney held the rate again.  The BOC has maintained its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

A softening economy both south of the border, and globally, with the addition disconcertion of a full blown financial crisis simmering in Europe was enough  encouragement for Carney to hold steady.

Although commodity prices have slid somewhat recently, they are expected to remain high over the coming months, because of strong global demand, in particular from emerging markets.

The Bank of Canada predicts too, that inflation will stay higher than the optimum 2%: “While underlying inflation is relatively subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term. Total CPI inflation is expected to converge with core inflation at 2 per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.”

Although some experts predict that a rate hike could take place over the summer, the vast majority of those in the know pick September as the likely month for the next rate hike to take place.  If that is the case, it will have been a full calendar year since the last rate hike- which took place in September 2010.

There is no question that a continued rate hold is promising news for the housing market- as prospective homebuyers may view this latest move as a temporary reprieve- and move towards action more readily- sensing that this is indeed a time limited offer.

There are concerns though, among many analysts, that affordability is an increasing concern in many regions across the country- and that the combination of rising property prices and higher interest rates may be enough to push home ownership out of reach for some- or land those home owners that are on the fringe in hot water.

There is a sense of ebb and flow in relation to the housing market, and the Canadian economy in general though, suggests the BOC: “The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation. On the other hand, the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.”

For now though, it is business as usual.

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Suprise: Low interest rates seen sticking around

Interest rates have recently being going somewhere unexpected: down.

At their trough last week, the yields on 10-year U.S. Treasuries, the benchmark North American rate, touched 3.11 per cent, the lowest level in six months and more than half a percentage point below their February peak.

Yields on 10-year Government of Canada bonds have fallen, too, and are now virtually identical to their U.S. counterparts.

The sliding rates have surprised many market watchers. With the United States government bumping up against its debt ceiling, inflation ticking upward, and a growing debt crisis in Europe, most expected interest rates to be increasing.

While predicting the future for rates is notoriously difficult, some observers believe that the current low-rate environment may continue for a while. If so, it will mean pain for savers, but good news for borrowers.

A drop in interest rates is equivalent to a sale on the price of money, and corporations are already rushing to take advantage of the easy lending conditions, even if they’re in no immediate need of funds. A case in point is Google Inc., which has $37-billion (U.S.) in cash and marketable securities on its balance sheet, but raised $3-billion from a bond issue last week anyway. Mortgage rates have fallen, too – good news for homeowners looking to refinance.

But lower rates have not turned out so well for some of the market’s savviest players, including Bill Gross, the founder of Pimco, the world’s biggest bond fund. Earlier this year, he sold his U.S. Treasuries, because he thought interest rates were poised to rocket higher, which would drive down prices of bonds.

It’s difficult to fault his logic: only a few months ago, the case for higher interest rates seemed so compelling.

Governments around the world are carrying bloated deficits and massive borrowing needs. In the United States, politicians have yet to agree on any clear path to deficit reduction, despite more than $1-trillion in annual red ink. Meanwhile, oil has been trading consistently around the $100-a-barrel level, thereby lifting inflation, another bond-market negative.

And the U.S. Federal Reserve is no longer putting its thumb on the scale. In less than six weeks, it is going to end its program of quantitative easing, under which it is buying $600-billion in Treasuries to goose the economy. Many bond-market followers believe the Fed’s massive buying binge has been propping up Treasury prices and keeping yields artificially low.

So what has been pushing rates lower in recent months?

A weaker-than-expected recovery is the major culprit. “The global economy, and the U.S. economy in particular, is not on quite as solid a recovery track as people were imagining in the very optimistic days of six months or so ago,” observes Peter Buchanan, senior economist at CIBC World Markets.

A slew of recent statistics underlines that weakness, ranging from the poor state of U.S. home sales to the slowing pace of U.S. manufacturing growth. Meanwhile, the Japanese economy, the world’s third-largest, is shrinking and creating a further drag on global commerce, although few foresee a double-dip recession.

“We’re looking ahead toward a bit of a cooling in economic growth,” said Paul Dales, senior U.S. economist at Capital Economics, who foresees output in the U.S. rising about 2 per cent this year.

That level of growth won’t be “anything to celebrate but it’s nothing like the recession we saw previously,” he said.

Another factor driving rates lower has been the early May rout in commodities, which dampened some of the worry on the inflation front. In addition, the recent sluggish performance of the stock market suggests that investors are getting nervous and growing more willing to buy super-safe government bonds.

Mr. Dales believes the current trends have room to run, and that rates will surprise to the downside.

He predicts U.S. 10-year Treasury yields could slip to 2.5 per cent in the low-growth, less inflation-spooked environment he foresees ahead.

If growth continues to be slow, lower rates might be staying around for a while.

Mr. Buchanan says the most likely scenario, given the poorer economic outlook, is for the Fed to hold off on raising rates until 2013. He believes the yield on Treasuries will rise gradually, instead of falling further, getting back to 3.4 per cent by the end of this year and to 4 per cent by the end of 2012.

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Canadian consumers expected to remain cautious as interest rates set to rise

Higher food and gasoline prices and hefty debt loads likely to be made worse by interest rate hikes will impact consumers’ buying habits going forward, say those who track retail spending.

It’s going to be tough for consumers who have depended on a low interest rate environment, said TD Bank economist Francis Fong, adding that rates are expected to go up this summer.

“The rising interest rate environment, this high household indebtedness situation — that’s all going to impede the ability of consumers to spend going forward,” Fong said Thursday from Toronto.

Statistics Canada said retail sales increased 0.4 per cent in February to $37.3 billion, giving retailers some relief after declining sales at the start of the year.

Consumers filling their tanks with higher-priced gas, along with those buying furniture and clothing, pushed sales higher in February.

But Fong said consumer spending will no longer be the same driving force going forward as it has been throughout the economic recovery.

The Retail Council of Canada said consumers are “still hanging back a little bit,” especially now that they have to spend more of their incomes on food and gas.

“Clearly, if they’re going to have spend a little bit more on basic necessities, they may pull back a little bit on the nice-to-haves, but not on the need-to-haves,” said spokeswoman Anne Kothawala.

Consumer confidence is soft and that mirrors spending, she added.

“Gas and food prices are actually very closely related. It costs more to transport goods,” Kothawala said.

Statistics Canada said the largest contributor to February’s increase in retail purchases in dollar terms was gasoline sales, which increased 1.3 per cent.

Gasoline prices have been surging along with crude oil, which began rising sharply in February with the outbreak of unrest in Libya, an OPEC member that accounted for about two per cent of the world’s crude output before civil war there.

As of Thursday, the Canadian average price compiled by was 129.6 cents per litre, up from about 118 cents per litre at the end of February.

But lower retail sales in Quebec — a 0.8 per cent decline — contributed the most towards the dampening of national retail sales, Statistics Canada said.

“The decline reflected, in part, lower sales of new motor vehicles in the province,” the federal agency said. “This was the second decline in retail sales in Quebec following six consecutive monthly gains.”

Quebec also increased its provincial sales tax to 8.5 per cent in January, up a percentage point.

Sales at clothing and clothing accessories stores were up 2.5 per cent, offsetting a decline in January. Sales at furniture and home furnishings stores grew 2.1 per cent in February, helped by gains in real estate sales.

Prof. Ken Wong of Queen’s University business school said once consumers pay down debt and spend more money on food and gas, there isn’t much left for anything else.

“You have to ask yourself what can be delayed and what can’t be delayed,” Wong said of consumer purchases.

“We cannot rely on interest rates remaining as low as they are as long as they have been going forward,” said Wong, who teaches business and marketing strategy.

Geographically, retail sales in February gained in six of 10 provinces, powered by Ontario where sales increased 0.7 per cent after two consecutive monthly declines.

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How much can you afford?

A great article here that articulates mortgage affordability.

Newly minted professionals shopping for their first home in downtown Toronto are real estate agent Andrew Bodnar’s typical clients.

“They see home ownership as a status symbol,” says Bodnar, an agent with ReMax Condos Plus, “and an investment.”

But young people who have just entered the full-time workforce probably don’t have large amounts money to put down; they may even find the mandatory minimum down payment of five per cent of the purchase price difficult to come up with. “For a $300,000 condo, a buyer will need minimum down payment of $15,000, plus about $7,500 in closing and legal fees, which means he’ll need $22,000 in liquid cash,” Bodnar says.

And they’ll need to determine how much they can afford to service the mortgage each month.

“Before we start looking at properties with clients,” Bodnar says, “we go through a personal financial analysis including monthly income and expenses, such as car payments and entertainment, to determine how much is available for mortgage payments.”

95-per-cent financing: A homebuyer’s income level will determine whether he or she qualifies for 95-per-cent financing, and lenders look at prospective clients’ “total debt service ratio,” or TDSR, the percentage of gross family income required to cover mortgage payments and other expenses.

“The formula lenders use to arrive at this percentage is to add up the annual mortgage payments, property tax, other payments such as car and credit card payments, 50 per cent of the condominium fee and heating costs. And divide that total by gross family income,” says Feisal Panjwani, senior mortgage consultant at mortgage broker Invis Inc. in Surrey, B.C.

Prospective buyers whose TDSRs exceed 40 per cent won’t qualify for a mortgage with most lenders, although Panjwani says some individuals with exceptionally strong credit ratings may be allowed up to 44 per cent.

Changes to Canadian mortgage rules introduced by federal Finance Minister Jim Flaherty in January will make it more difficult for some people to qualify for 95-per-cent financing. The amortization period for government-backed mortgages has been lowered to 30 years from 35 years. With a lower amortization period, mortgage payments will be higher, increasing the percentage of gross family income required to cover them.

But do buyers who qualify for 95-per-cent financing feel comfortable acquiring a debt of this size?

Homebuyers should keep well under the maximum they qualify for in order to have a buffer for emergency expenses, Panjwani says. “Interest rates will likely increase in the next few years. Most economists are expecting an increase of at least per cent on the variable rate over the next two years.”

First-time homebuyers can use assets from their RRSPs to increase their down payment, he adds. Under the federal Home Buyers’ Plan, they can borrow up to $25,000 ($50,000 for a couple) from their RRSPS without having to include the withdrawal on their tax returns, but must repay the amount into the plan within 15 years. “But young people may not yet have put much into their RRSPs,” he notes.

Renting out space in the home, such as a basement suite, can augment income for those on tight budgets. “But only half of this rental income can be added to gross income to help buyers qualify for a mortgage,” Panjwani says.

“This is to allow for the fact that this space may not always be rented out.”

If 40 per cent of a homeowner’s gross income is going to service his mortgage, he’ll have very little left over for living expenses or for improvements on the home, says Peter Veselinovich, Investors Group’s vice-president, banking and mortgage operations, in Winnipeg.

“He may be taking on more debt than he’s comfortable with,” he adds. “Would-be homeowners often panic, thinking if they don’t buy now, and interest rates and house prices go up, they’ll never have a home. But first-time homeowners are typically young people who may not be prepared for life’s happenstances, such as having a family and getting laid off from their jobs.”

A home shouldn’t make its owner house-poor, Bodnar adds. “It should complement your life, not rule it.”

Veselinovich recommends looking at a mortgage as part of the family’s overall financial plan, and recommends working with a financial adviser, who will put the prospective homeowners on a savings plan tailored to the family’s goals and needs, before buying.

“The adviser may well suggest that the first home be more modest that what the client has envisioned,” he added.

100-per cent-financing still available option: Those determined to get into the housing market may be able to get financing for their down payment. Buyers with good incomes and excellent credit ratings may be able to access “free down payment mortgages” that will give the purchaser five per cent of the purchase price for a mortgage on closings.

“This is basically a cashback program for people with good credit and income, and the rate is bonused to cover the five per cent given towards the down payment,” Panjwani says.

Veselinovich cautions against 100-per-cent financing. “Buyers are taking on a huge debt at a period in the housing market when they might not realize much growth in equity for a while. And right now it’s only a matter of when interest rates will go up.

“If they can’t save the per cent needed for a down payment,” he adds, “they probably need advice on developing discipline in planning and saving for their plans. Life changes may occur that will force them to sell because they can no longer afford their home.”


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Bank of Canada holds key rate

OTTAWA — The Bank of Canada said Tuesday the economy is growing at a “slightly” faster pace than expected as signs emerge of a recovery in exports – although that remains at risk due to a high dollar and poor productivity.

Strength in commodity prices, which is a driving factor behind the Canadian dollar, could get a further short-term boost from recent unrest in north Africa and the Middle East, the central bank added.

As expected, the central bank kept its benchmark rate unchanged at 1%. In a five-paragraph statement, it acknowledged conditions in Canada are strengthening, a day after Statistics Canada reported the economy grew at a 3.3% annualized clip in the fourth quarter — or a full percentage point above the central bank’s forecast. Part of this is due to U.S. economic activity that is “solidifying.”


Furthermore, the central bank said early signals suggest a necessary transition is underway, from an economy powered mostly by consumers to business investment and exports.

The Canadian dollar weakened to C$0.9730 to the U.S. dollar after the bank’s statement.

“The recovery in Canada is proceeding slightly faster than expected,” the central bank, led by governor Mark Carney, said, “and there is more evidence of the anticipated rebalancing of demand.”

In its last rate decision on Jan. 18, the central bank said economic recovery in Canada was headed for a period of “more modest growth,” with 2.4% expansion expected in 2011. At the time, Mr. Carney said the country would be hard pressed to “fully benefit” from an upswing in U.S. prospects due to a lack of competitiveness. But the 2011 outlook is near the low end of expectations compared with private-sector economists, who upgraded their forecasts further after the release of fourth-quarter GDP data.

At present, the Bank of Canada said in its Tuesday statement, domestic demand continues to expand although household spending is “moving” in line with growth in disposable income. Over the past year the central bank has raised myriad concerns about the record levels of debt households are carrying, prompting the federal government to move twice to toughen mortgage-lending standards.

In the Bank of Canada’s view, business investment continues to “expand rapidly” as companies take advantage of low interest rates and the need to boost competitiveness. And an anticipated comeback by the trade-oriented sector appears to be unfolding.

“There is early evidence of a recovery in net exports, supported by stronger U.S. activity and global demand for commodities,” it said, although warning: “The export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance.”

Prior to the rate statement’s release, the Canadian dollar touched another 40-month high, as the loonie hit US$1.0309, up from Monday’s close in the US$1.029 range. The Canadian currency shot upward after the release of the GDP data, on the anticipation the Bank of Canada may begin raising rates earlier than previously believed.

Traders have priced in 100% odds of a rate hike in July, once the U.S. Federal Reserve completes its US$600-billion asset-purchase plan. But some analysts say the GDP report tilts the balance back in favour of an interest rate increase in May.

Derek Holt at Scotia Capital, however, told clients prior to the Bank of Canada release that he expected Mr. Carney to highlight concerns about the loonie.

“Don’t expect the Bank of Canada to abandon its commitment to arguing that over the full cycle, Canada’s lackluster productivity gains and an elevated currency will constrain the extent to which Canada leverages up the U.S. recovery just because one quarter’s worth of data counsels otherwise,” he said.

The Canadian dollar rise is powered by the country’s relatively sterling fiscal fundamentals, economic prospects, and a rise in commodity prices — highlighted by oil prices cracking the US$100 a barrel level last week on concern about Libya.

In the rate statement, the central bank said robust demand from emerging economies is driving the strength in commodity prices, “which could be further reinforced temporarily by supply shocks arising from recent geopolitical events.” That was the only reference to the potential risks posed by a growing wave of protests across north Africa and the Middle East.

Global inflation pressures are rising due to higher energy and food costs. But in Canada, the central bank said inflation is in line with its expectations – the core rate, which strips out volatile-priced items, stood at 1.4% in January – and pricing pressures remain subdued, reflecting “considerable slack” in the economy.

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