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Call for Longer Mortgage Terms Raises Questions STEVE HUEBLMAY 8, 2019
Article Link; https://www.canadianmortgagetrends.com/2019/05/bocs-call-for-longer-mortgage-terms-raises-questions/
Earlier this week, Bank of Canada Governor Stephen Poloz called on banks and other lenders to offer more innovative mortgage products, namely longer-term mortgages.
During a speech in Winnipeg, he said longer mortgage terms would mitigate the normal risks in the system both for lenders and for borrowers. He didnt specify just how long those terms could be, but the longest widely available term in Canada is currently 10 years, while terms of 15, 20 or even 30 years are common in the U.S.
For consumers, the reduced mortgage renewal frequency over the life of the mortgage would remove the risk of renewing into higher rates, Poloz said. Of course, a longer-term mortgage will carry a higher interest rate, but some homebuyers may be willing to pay more to lower their risk, he added.
Just how much more? Rate expert Rob McLister of RateSpy.com suggested a 30-year mortgage, for example, could run around 3.75% or more given where bond market spreads are right now.
And thats probably a best-case rate, assuming a liquid funding market. In the U.S., 30-year rates are north of 4%, he wrote on RateSpy.com. On a standard $300,000 30-year mortgage at 3.75% youd pay $10,829 more interest over the first 60 months aloneversus a 3.00% 5-year fixed.
Little Appetite for Longer Terms
The Bank of Canadas own data shows that currently, just 2% of mortgages have terms greater than five years. And thats for good reason. A longer mortgage comes with certain drawbacks. Aside from paying a higher rate, they would also face a higher likelihood of having to break the mortgage early.
Even though mortgage terms longer than five years are protected by the Interest Actwhich means the penalty for breaking that mortgage would be limited to three months interest (vs. an IRD penalty) after the first five yearsa multi-decade term would heighten the likelihood of borrowers breaking their mortgage early.
For that reason, Ron Butler of Butler Mortgage said mortgages of that length would have to be exempt from breakage penalties, similar to the no penalty system in place in the U.S.
Even Canadas most popular mortgage termthe 5-year fixedis longer than most borrowers stick with their current mortgage for. James Laird, President of CanWise Financial and co-founder of Ratehub.ca, says stats show most mortgage terms are kept for just shy of four years.
Some might suggest that perhaps its bad advice to be recommending these longer terms, Laird said. Because even though the borrower might feel settled, we know that life events occur, which can cause people to break their mortgage more quickly than they are expecting.
Additionally, he said borrowers would need a compelling reason to pay more for the security of a longer term, namely the expectation that interest rates are going to rise over that time. Plus, the extra cost to lock in would have to be reasonable.
If those two things are occurring, and you have a household that thinks theyre not moving for 10 years, okay, youve got ingredients for someone to take a longer term, Laird said, adding the last time he saw those ingredients come together was in 2012 when 10-year fixed rates fell below 4.00%, 5-year rates were above 3.00% and many expected interest rates to rise. But the Governor doesnt help his case by telling us rates are not going to move for a sustained period of time. That is not a good reason to go with a longer term. Thats justification for taking a variable rate or short term.
An Answer to the Stress Test?
Polozs call to arms for the industry to introduce longer mortgage terms appears to be a response to criticism over the governments stress test, which has sidelined the buying intentions of an estimated 40,000 homebuyers since it was introduced last year.
The Bank of Canada has a particular view of the stress test as a means to reduce leverage and tamp down soaring prices, Butler said, suggesting theyre floating the idea of longer mortgages as an alternative solution to assisting homebuyers as opposed to adjusting the stress test.
Poloz himself said, The longer the mortgage term, the less relevant a mortgage interest-rate stress test becomes, pointing to the increased amount of equity built up in between renewal periods.
Up to Government to Create the Appropriate Conditions, Not Lenders
But not everyone believes the onus should fall on the industry to develop solutions to make longer-term mortgages more attractive.
I found it interesting that Poloz is calling on others to make this happen when, in my opinion, its the policy-makers in Ottawa who have actually completely taken away any incentive to lock into a longer-term fixed rate, Laird said, pointing to the stress tests added qualification burden on longer-term rates.
For a 10-year rate at 4.00%, the borrower instead needs to qualify at 6.00% vs. a qualification rate of 5.34% for a shorter term fixed or variable rate, Laird noted. In my opinion, the tools are in (Polozs) hands and the other regulatory bodies in Ottawa. If theyre thinking, Lets get more borrowers into longer-term fixed rates, they can make that happen.
McLister added that if the government is serious about this, it would also have to facilitate cost-effective long-term funding to support those mortgages.
Government-sponsored funding vehicles (like the NHA MBS and Canada Mortgage Bond programs) currently only support up to 10-year terms and are dominated by 5-year securities, he noted. Private mortgage-backed securities, in their current incarnation, would not have tight enough spreads to allow for competitive 30-year rates.
Butler agreed, saying, Vast changes would be required in our mortgage financing system.
In other words, dont hold your breath for cost-effective longer-term mortgages anytime soon.
THREE GRAND PRIZE WINNERS FROM ALBERTA, MANITOBA AND NEWFOUNDLAND WIN MEANING OF HOME CONTEST IN SUPPORT OF HABITAT FOR HUMANITY CANADA
Over 8,000 Grades 4, 5 and 6 students from across Canada shared what home means to them in the annual Meaning of Home contest in support of Habitat for Humanity Canada. Each of the three grand prize winners (one from each grade) will receive a $25,000 grant to be directed to the local Habitat build of their choice. Nine runners up have won a $5,000 grant towards a local Habitat for Humanity home build. Every student entry earned a $10 donation for that students local Habitat for Humanity, helping to raise an additional $82,000 that will go towards building more homes in communities across Canada.
Mallory Pitzner, from Airdrie, Alberta is the Grade 4 grand prize winner and will be directing her $25,000 grant to Habitat for Humanity Southern Alberta. Click here to read Mallorys winning poem When I Think of Home.
Eva Marasa is the Grade 5 grand prize winner, from Winnipeg, Manitoba. Her grant will be directed to Habitat for Humanity Manitoba. Click here to read Evas winning poem: Home.
The Grade 6 grand prize winner is Hannah Brown, from St. Johns, Newfoundland, who is directing her grant to help build homes with Habitat for Humanity Newfoundland Labrador. Click here to read Hannahs winning poem: Home.
I want to congratulate all the winners, but I also want to thank every student who entered and shared what home means to them, said Mark Rodgers, President and CEO of Habitat for Humanity Canada. Each and every one of you has made a tangible difference in your community - helping raise both awareness and funds that will allow us to serve more families.
Canadian home sales rise again in May 2019
Home sales recorded via Canadian MLS Systems rose by 1.9% in May 2019. Together with monthly gains in March and April, activity in May reached the highest level since January 2018. While sales stood 8.9% above the six-year low reached in February 2019, this latest increase has only just returned levels to their historical average.
While May sales were only up in half of all local markets, that list included almost all large markets, led by gains in both the Greater Vancouver (GVA) and Greater Toronto (GTA) areas.
Actual (not seasonally adjusted) sales activity was up 6.7% compared to May 2018, marking the largest y-o-y gain recorded since the summer of 2016. The increase returned sales in line with the 10-year average for the month of May. While about two-thirds of local markets posted y-o-y gains for the month, the national increase was dominated by improving sales trends in the GTA, which accounted for close to half of the overall increase.
Home price trends and market balance continues to differ significantly among Canadian housing markets, said Jason Stephen, CREAs President. All real estate is local. No matter where you are, a professional REALTOR is your best source for information and guidance in negotiations to purchase or sell a home during these changing times, said Stephen.
The mortgage stress-test continues to present challenges for home buyers in housing markets where they have plenty of homes to choose from but are forced by the test to save up a bigger down payment, said Gregory Klump, CREAs Chief Economist. Hopefully the stress-test can be fine tuned to enable home buyers to qualify for mortgage financing sooner without causing prices to shoot up.