Top 5 Things to Know About Your Mortgage Now
These are the key factors that will affect Canadian mortgages and rates going forward.
1. The latest employment data
Last Friday, Statistics Canada estimated that our economy created 62,000 new jobs in November, far more than the consensus estimate of 20,000.
The market reaction to this upside surprise was muted, however, as data only tracked results through November 14, meaning most of the impact of the recently introduced foreclosure measures did not materialize. still reflected in the numbers.
Namely, Manitoba introduced tougher restrictions on November 12 and despite a narrow overlap of just three days with November data from Statistics Canada, that province recorded a loss of almost 18,000 jobs last month. This is interpreted as a worrying sign for Ontario, which introduced tighter restrictions in the Toronto area on November 20.
Our latest employment results were good news, but concerns previously expressed That increasing COVID infection rates will reduce our employment momentum still seems well founded.
2. The debt deferral cliff
When the first wave of the pandemic was in full swing, CMHC CEO Evan Siddall worryingly warned of a debt deferral cliff that would materialize when deferred mortgage repayment periods were exhausted and debt deferred. Canadians could not make their mortgage payments.
Most lenders allowed a maximum deferral period of six months. Since most postponements started in the spring, that meant September and October would become the truth months.
Fast forward to now.
A recent report from the Bank of Canada (BoC) estimated that in September, 99% of mortgages who had received deferrals had successfully resumed their regular payments at the end of their deferral periods.
Additionally, the overall default rate on mortgages that had completed a deferral period was actually lower than the pre-pandemic default rate for all mortgages – and so were other forms of debt, including installment loans, credit cards and unsecured lines of credit. credit.
Last week we received the third quarter earnings reports from the big six banks, and they further supported the BoC’s findings. For example, TD Bank estimated that 98.7% of all of its deferred debt had resumed its regular payments.
These results shouldn’t come as much of a surprise.
Our federal government provided more than $ 2 in stimulus for every $ 1 lost due to the negative economic effects of the pandemic. Anyone who takes a longer-term view will note that this aggressive response effectively socialized the losses that would otherwise have been incurred by individuals (which, to my office, seemed like a fair result, all things considered).
Reasons aside, the deferral cliff ended up being little more than a divot.
3. Changes to the First-Time Home Buyer Incentive Program (FTHBI)
Last week, the federal government announced changes to its FTHBI. Before going through them, let’s start with a quick reminder of how the FTHBI program works:
- The FTHBI gives first-time buyers with a down payment of at least 5% access to a federal government equity loan under certain conditions.
- The federal government will inject up to 5% of the purchase price on resale properties and up to 10% for new construction.
- FTHBI funds are recorded on the title as a loan, but no interest is charged and no regular payment is required.
- Instead, the loan is paid off when the house is sold. If you initially borrowed 5% of the purchase price, then you must return 5% of the proceeds when selling (which is why this is called an equity loan).
- Until now, the program was limited to first-time buyers with a household income of less than $ 120,000, and the maximum purchase price was capped at four times each household’s annual income (which places the price of maximum eligible purchase of just over $ 500,000).
The program was announced with great fanfare in the last federal election, but it was greeted with a collective yawn from borrowers. (CMHC has set aside $ 1.75 billion for the program and Canadian Mortgage Trends recently reported that, so far, it has only loaned $ 173 million.)
Last week, the federal government announced an adjustment to the FTHBI that raised income and purchase price caps for borrowers in Toronto, Vancouver and Victoria.
In the future, first-time buyers in these cities can borrow up to 4.5 times their income, raising the maximum possible purchase price in these cities from about $ 500,000 to $ 720,000.
While this change will help a small subset of borrowers in Canada’s most expensive markets, it doesn’t correct what I see as the program’s fundamental flaw: borrowers don’t want to share their benefits.
Rightly or wrongly, people buy homes because they think / hope / expect them to increase in value.
If you borrow a fixed amount of money from a lender and the value of your property increases, your equity position increases. If you borrow money using the FTHBI, that loan amount increases (and decreases) based on the value of the property, thus limiting a borrower’s benefit (in exchange for limiting their downside as well) .
It’s a tradeoff that eligible borrowers have been reluctant to make so far, likely because anyone willing to buy a home expects its value to rise. This modification will not change anything.
4. Bond yields rise, but mortgage rates fall
First of all, a little history.
The five-year Government of Canada (GC) bond yield, on which our five-year fixed mortgage rates are set, has spent most of the pandemic trading in a very narrow range between 0.35% and 0. , 40%.
That was until November, when positive vaccine news pushed it to around 0.48% and lenders began warning their five-year fixed rates would rise soon.
Last week, the yield on five-year Government of Canada bonds fell north of 0.50%, but instead of continuing rate hikes, several lenders announced cuts to their fixed and variable rates.
Gross credit spreads have now come down to levels we typically only see during the spring market, when competition among lenders is most intense.
If we needed one more sign that 2020 has been a year like no other, it is.
5. COVID vs vaccines
It’s a bit outside of my usual topic, but since the pandemic is affecting just about everything and everywhere, here is my current assessment.
On the one hand, we have rising infection rates and increased restrictions that are straining already vulnerable areas of our economy. There are a lot of sad stories of companies that barely survived the first wave about to shut down for good as the second wave intensifies.
On the flip side, we have seen unprecedented vaccine breakthroughs that offer light at the end of this dark tunnel that we find ourselves stuck in and manufacturers rushing to mass produce them.
Will the vaccines arrive in time and in the numbers needed to stem the economic damage that continues to accumulate? Will enough people take them to achieve the level of herd immunity we need to end this pandemic?
If I list five things that concern me these days, I cannot stop without listing humanity’s struggle against this virus. When your moment comes, please part ways, and I promise you that I will do mine.
#to get vaccinated
The bottom line: Five-year fixed and variable mortgage rates fell further last week.
The yield on five-year Government of Canada bonds, on which our five-year fixed rates are set, continued to rise last week, and there was no change in the BoC’s key rate, on which our variable mortgage rates are set.
This means that the drop in mortgage rates last week came at the expense of gross credit spreads.
The weather outside can get colder, but the competition among lenders is increasing. This portends stable or falling rates ahead.
Image credit: iStock / Getty Images
David Larock is a full-time independent mortgage broker and industry insider working with Canadian borrowers from coast to coast. David’s articles appear on Mondays on this blog, Move Smartly, and on his blog, Integrated mortgage planners/ Blog.