Rate Miser Blog Feed

Focusing on the Long Term: Why the deficit is not the priority.

Layth Matthews, AMP, MBA, CIM — Wed, 15 Jun 2011 3:51:31 PM EST

A softening economic trend south of the border casts a bit of a shadow on the outlook for the Canadian economy. Nevertheless, our relatively conservative habits have kept us from the worst of the unemployment and real estate value problems they are still grappling with.

Interestingly, many economists do not think the US should be too concerned about their deficits right now. Obsessing over the deficit is like someone who has just been laid off from a dying industry using their severance to pay down credit cards instead of investing in retraining. One option provides much longer term and widely distributed benefits than the other.

The interest rates on government debt in the US – and in Canada – are at historically low levels. This is a huge opportunity and the natural time for governments to invest in those big infrastructure upgrades e.g. Mass transit, renewable energy, telecommunications, and create jobs in the process. The financial markets are basically begging them to do so by offering such low rates. Making these pro-active investments will put us in a better position for future growth, which will keep future interest rates low and make paying off these debts a piece of cake.

The same is true for Canadian households in some ways. This is a time of incredibly low mortgage rates and should be taken advantage of to invest in things that will reduce your household cost of living and/or increase income. Such as?

renovating to add an income suite or buying a home with one.
Energy efficiency upgrades.
Consolidating higher interest debts into the mortgage and then
shortening the mortgage amortization.
Buying a rental income property

We expect mortgage interest rates to remain low and possibly drift a little lower, until we start seeing more consistently good news about employment. Higher oil and food prices will actually put downward pressure on prime rate here in Canada as they will depress consumer spending while putting upward pressure on our dollar. Both of these are reasons why inflation and prime rate will remain low.

We continue to believe the benefits of variable rate mortgages far outweigh the risks in this slow economic time. That being said, fixed mortgage rates are so low now, no one would fault you for going that way if you choose to!

The Great Race to the Bottom

Layth Matthews, AMP, MBA, CIM — Mon, 29 Nov 2010 1:37:35 PM EST

A recession is a time when organizations and households race to cut expenses and re-focus on financial strength. Consolidating debts into the mortgage and homes with income are two good strategies. The economy naturally recovers when enough households feel secure enough that they begin to invest and spend more creatively. The question is, how much and how long will it take to get us to the bottom of the pool so we can push up with confidence?

Technically we are no longer in recession now. It felt like a big drop, but the landing pad for this recession was fully inflated with the most extreme fiscal and monetary stimulus since world war II. Governments have extended EI benefits, bailed out huge companies like GM, resisted local tax hikes, and cut interest rates to the floor. Juicing the economy was appropriate and relatively painless initially because the "flight to safety" meant there were lots of investors looking for safe government bonds to invest in. Demand for government bonds significantly reduced the interest rates that governments had to pay to finance all the bail outs.

Now the demand for safe government bonds is ebbing, which means government borrowing costs, which form the floor of all borrowing costs, are starting to rise. You can see the beginnings of investors moving out of ultra-safe government bonds in the very recent bump in fixed mortgage rates. On the other hand, countries with the least financial strength, first Greece and now Ireland are struggling with emergency cut backs to finance their bailouts. Here in Canada things are better but there is already pressure to raise taxes and cut social welfare benefits before the recovery trend is fully established.

The good news is that monetary policy makers are taking note of this "unusual uncertainty" and so we are unlikely to see additional rate hikes by the Bank of Canada for some time unless the recovery quickens. The more significant risk is that the last round of stimulus is going to be a hard act to follow if the recovery doesn't last.

Given the continuing uncertainty in the economy the prudent thing to do at this point is to keep making yourself as financially strong on a risk adjusted cashflow basis as you can. Yes, friends put off that new Ferrari or family re-union in Tahiti a few more months, because it may turn out that this recession race to the bottom may be running in stages! And the question may very soon be, "are you ready for stage II?"

Strategies for Stage II

It is not time to focus on getting rich, yet, but rather we should use this economic breather to redouble our focus on not getting poor! When we refer to making yourself strong on a "risk adjusted cashflow basis" we are talking about maximizing your most conservative income forecast and minimizing the monthly cashflow required to maintain a sane household. The goal is to feel very confident that you can cover your bills even under a further downturn scenario.

What are some ways to make yourself strong? One is to consolidate higher interest debt into the mortgage. This should reduce your mortgage rate and your minimum required payment as much as possible. You can then use pre-payment privileges to shorten your effective amortization significantly as resources allow. We highly recommend these additional mortgage payments if you can afford it as rates will surely rise from these levels when the true bottom of this economic cycle is eventually reached.

If your income is strong, this might be the time to go for a shorter amortization like 15 years. Interest rates are so low now that clients can sometimes consolidate debts and shorten amortization (amortization is the length of time to pay off the mortgage in total) and reduce total monthly payments all in one go!

The Foundation Line

Hopefully, we are at the beginning of a genuine long term recovery. But there is still enough uncertainty in the outlook that it would be wise to use this breathing room to take another deep breath in case the race to the bottom isn't over.

Ask your RateMiser Mortgage Advisor to review your financial picture to see if you can save money and make yourself stronger at the same time.

The Eye of the Storm

Layth Matthews, AMP, MBA, CIM — Fri, 17 Sep 2010 1:52:50 AM EST

The big news is that there is still no real good news about the economy. Typically, the economy rebounds 12-18 months after the Bank of Canada completes a series of rate drops. This relationship is so reliable that policy makers anticipate the rebound even before it shows up in the employment and GDP statistics.

This time was no exception. The Bank of Canada and the Federal government started their economic sabre rattling this spring when they started talking of interest rate hikes and tightened up mortgage lending rules. This was partly understandable because the series of rate drops and safety net programs introduced 12-18 months prior were unprecedented since, well, the great depression.

But alas it appears that last year was basically just the eye of the storm, a storm that hasn't even been a hurricane in Canada, yet. But now maybe it's our turn.

Commodity prices did not fall so much in the first half of the storm because global corporations and investors figured when the stimulus programs kicked in, that surely there would be a cyclical recovery and so they rebuilt inventory, with the help of our raw materials. Households cut back but not too hard, because the job market held up pretty much.

Now there is an eerie calm settling over the Canadian housing market that is making policy makers re-think their outlooks and contemplate a "revision" of some of those tightening moves.

The new qualifying rate introduced for variable rate mortgage borrowers in April has been reduced steadily from near 6% down to 5.39% last week. 100% of rental income can now be incorporated into new mortgage applications vs. 50% last spring.

It is hard to tell where things are going, because any minute now all that stimulus could kick off a new boom. But that will be a nice problem to have.

Interest rates have remained low. Fixed rates are actually falling in response to the Bank of Canada's rate hikes, because investors figure the risk of future inflation falls every time the bank rate goes up.

We still believe variable rate mortgages are the most attractive on a risk adjusted basis and that this is a good time to refinance to get your rate down and your cashflow up if you are in a position to do so.

Call your RateMiser mortgage advisor to review your options and the costs and benefits of refinancing your mortgage or any mortgage related strategies you have in mind.

The New Normal in Real Estate Investing

Layth Matthews, AMP, MBA, CIM — Fri, 17 Sep 2010 1:34:57 AM EST

Real estate investing hasn't been a risky proposition for many years. Over the last 15 years buying a home for yourself with an eye to turning it into a rental has been a really easy way to start building your empire, under normal circumstances. But that approach has become far less certain for all but the least expensive of homes. Almost overnight a new normal has emerged for real estate investors.

In the old normal, 5% per year was considered a conservative projection of future appreciation for a house in many communities. If your down payment was 5%, that's a 100% annual capital appreciation rate! Any net income, rent less mortgage plus expenses, was just a bonus.

Real estate has appreciated far more steadily than the stock market, and as a consequence it has been easy to finance. The combination of flexibility in financing and low mortgage rates have allowed prices to continue to rise, in Canada, despite a sluggish economy and an aging demographic picture, until now.

At this point, interest rates have fallen about as low as they can go, the economy is soft, and the average age of the adult population is still marching into the frugal years. So the question is, "what's next for real estate prices?"

One thing that is for certain is that the level of appreciation we can expect is now very uncertain. Another thing we do know for certain is that CMHC has reduced the amount of rental income allowed to be incorporated into a mortgage application, making it tougher for rental property owners to buy new homes for themselves, let alone new rental properties. As far as rental properties are concerned you also need to put 20% down to buy one now.

What does this mean for those who would build wealth in real estate? First, it is a buyer's market, if you can muster the funds for a 20% down payment. And second, it is time to focus on income.

In this new normal, where real estate appreciation must be assumed to be nil or less, the old strategy of just keeping the last family home is riskier and more of a burden on the financing of future investments.

For example, In the old normal a $400,000 family home plus income unit, in a nice neighborhood, that brings in $2000 per month of rent was a great investment. The income would cover the mortgage and all or most of the expenses. 5% appreciation would bring $20,000 per year in capital gains. In the new normal, without assumed appreciation, by the time you pay the mortgage and other bills, you're risking a $400k investment with a forecast return of break even at best!

In this new normal world, careful investors are looking for properties that make sense on the merits of the income they generate alone. These properties will tend to have more units and significantly higher rental income for the price. It is possible in many places to find a triplex or a fourplex property with $2000 per month income for $200,000, for example. You may have to look at properties further from home than you are used to and the increased number of units will increase your management costs, but the additional income will easily cover the cost of a local property manager, if you find the right property. In the new normal, capital appreciation is also a possibility, but should be regarded as just a bonus.

Call your RateMiser Mortgage Advisor to help you determine your buying power and discover your best investment opportunities in this new normal world for real estate investors.

The Silver Lining of a Weak Economy: Low Variable and Fixed Rates Ahead

Layth Matthews, AMP, MBA, CIM — Wed, 28 Jul 2010 9:15:50 PM EST

U.S. and Canadian economic indicators are pointing to low inflation and mortgage rates ahead. The consensus is that variable mortgage rates are likely to rise no more than .75%, if that much, over the next 12 months. There is also speculation that fixed mortgage rates will remain low or even fall in the near future.

The new restrictive mortgage rules introduced by the Canadian Finance minister this spring have already begun to be relaxed in effect, by the marketplace, making it a little easier for borrowers to qualify for variable rates and allowing rental income to contribute more to the mortgage qualification ratios. Hopefully, some of these policies will be relaxed again soon.

We continue to believe variable rate mortgages are clearly superior on a risk adjusted basis. Some home owners with variable and fixed rate mortgages acquired at higher rates in the period from 2007 to Spring 2010 may be able to achieve significant cost savings by refinancing to reduce their mortgage rate at this time.

If you acquired your mortgage in that time frame please discuss your options with a Mortgage Advisor at your earliest convenience.

Re-inflation or Deflation that is the Question

Layth Matthews, AMP, MBA, CIM — Thu, 17 Jun 2010 1:22:54 PM EST

A barbell investment strategy is one employed when there are two very different but compelling, forecasts at play. If you want to know what kind of economic environment begs for a barbell strategy, look around, we're living in one. The current economy is a tug of war between re-inflation and deflation. Note, I said re-inflation, because significant inflation is revealing itself to be a nice problem to have in many countries, if you can get it. Inflation, you see, is very forgiving and much easier to manage than deflation.

Re-inflation

In today's economy the optimists believe in a return to normal growth and inflation levels, hence re-inflation. "Re-inflation" means a fairly rapid recovery of ground lost in the last two years. Sure the durable goods and housing numbers are up smartly over last year, but last year was 50% below the boom levels of the prior year in many cases. So we would require a 100% increase to get back to where we were!

The re-inflation camp sees this lost ground being regained over the next three years. Re-inflation is distinct from inflation because at the core, inflation usually flows from demand for goods owing to a strong job market and we do not have a strong job market.

With "re-inflation" (or slow, unsteady recovery) being the optimistic scenario, we will see a slow and unsteady climb to higher mortgage rates. Variable mortgage rates will rise over the next few years from their current level of 1.9%, but are still likely to average less than current fixed rates of around 4.25% over the next 5 years. For those who don't want the aggravation, the new MERIX 50/50 hybrid mortgages with half the mortgage fixed and half variable are a good product. Homes are likely to appreciate in the very low single digits under this scenario.

Don't Fight the Fed

Seeking guidance for the future of the economy is tough, but over the years, stock market performance has been one of the best leading indicators for where the economy is headed next.

But how do you guess where the stock market is going when all the data is mixed and in the rear-view mirror?

"Don't fight the fed", is the rallying cry of investors who want to get the jump on a murky statistical outlook. The expression refers to an historically reliable relationship between central bank rate changes and economic growth. Whenever central banks have cut rates sharply, like they did 18-24 months ago in Canada and the US, the economy has generally been sure to respond, 18-24 months later. So, any time now...

Deflation

On the other side of the barbell is the preferred strategies of the, "Deflation" camp. This is the outlook that suggests there is more severe economic pain to come. This camp believes the only thing keeping us from an all out depression (unemployment in the high teens or worse, stock markets down more than 50%...) so far has been government stimulus.

Deflationists, point to the lack of business lending and the lack of consumer borrowing that is going on, despite incredible rate cuts! This widespread weak demand is pulling home values and wage rates down in the US and will potentially effect Canada in a similar way. There is also an argument that the average age of the population has passed the point of peak spending and so this falling demand trend will continue for years.

The "Deflation" scenario also begs for variable rate mortgages, because the one thing the Bank of Canada has been able to do is hold prime rate down. But there is also likely to be much more uncertainty in this economic environment. So deflation argues for aggressive debt consolidation to reduce minimum payments in case of job loss and in-law suites for additional income sources! All but the most clearly rationalized home prices are vulnerable to decline under the deflation scenario.

What is a Mortgagor to do?

So take your pick. Is your economic outlook stable? or outright depressing? the V-shaped, sharp recovery forecaster camp has had to step to the sidelines for now. I'd say their odds are down below 20%. I'm betting the odds of re-inflation are at 50% (single digit house price growth) and Deflation an ominous 30%.

Our view is that variable rate mortgages, consolidating debts to improve cashflow, and using pre-payment privileges to shorten amortizations is still the best way to go.

Home buyers should be conservative and income property biased for now. A time will come when buying a mansion will be the right investment move. But this is a time for converting mansions into suites!

Slow growth? Probably. Stability, Maybe.

Layth Matthews, AMP, MBA, CIM — Fri, 21 May 2010 5:29:19 PM EST

Since my last blog, the European Union and Euro have come to the brink of collapse and then been saved by aggressive and amazingly unified policy maneuvering by the strongest countries. I guess they really want the Euro to survive and are prepared to make huge sacrifices to support the Union. On the other hand, funding is only half of the equation. It's going to take some serious leadership to get the PIGS (Portugal, Italy, Greece, and Spain) countries to fly.

By leadership I mean that the PIGS politicians must now convince their populations to accept significant reductions in salaries and services or face huge unemployment and social breakdowns. Basically, they need to spread out the pain as evenly as they can without the benefit of an across the board currency devaluation to make it so.

That being said, they just might do it. Why? Because they are not alone and because the freedoms of a united Europe are the best thing going in that part of the world. Labour can move to where the jobs are and goods can be shipped easily to where the buyers are. Plus by now the Germans have condos in Spain and the Spanish kids have jobs in France.

What does that have to do with mortgage rates in Canada?

The instability of the Euro is the single greatest threat to the stability of the world economy (this week). If they can sort that out, it will be one more brick in the wall of a new normal, and we will all sustain a new slow growth rate. If Europe cannot stabilize itself, mortgage rates will be higher than they should and we will see property prices deflate along with employment and exports.

So if you need to sell your house in the next few years, ASAP might be more prudent than later. If it is time to buy, buy a place that you don't mind holding for 10 years as this might take a while.

Shorter Amortizations are In!

We still think variable rate mortgages are the way to ride this storm out. A lot of our clients are refinancing to reduce rate, consolidate debts and shorten their amortizations all in one go. The shorter the amortization the more quickly your mortgage balance declines and the less exposure you have to rising rates. Variable mortgages rates have just dropped this morning to Prime -.6% ( which is 1.65% for the moment!). Can't argue too much with that.

If you are not comfortable with a straight variable rate mortgage, ask us about the MERIX 50/50 mortgage available with half 5 year fixed and half variable rate both with 5 year terms. These are perhaps more stable, and certainly easier to qualify for than a straight variable rate mortgage at the current benchmark rate.

Spring in the Tundra Economy

Layth Matthews, AMP, MBA, CIM — Sat, 8 May 2010 12:14:37 PM EST

The darkest days of the recession are behind us now. The economy is showing signs of growth in a wide range of industries and indicators. The strongest of these "come backs" are usually year over year comparisons with sectors that were hardest hit by the recession and have received massive tax breaks and rate cuts (e.g. Auto sales and housing starts). Hence, the one year and one month percentage growth numbers look good, but you have to ask yourself, "where would we be without such massive support?"

Nevertheless, consumers are beginning to respond to their "pent-up demand" and spend again, cautiously.

The best case scenario is that we will emerge into a slow growth economy. Interest rates will rise, quickly at first, but no more than about 3% over as many years. This will bring Canadian discounted variable rate mortgages, the best of which are now at 1.75%, up to a peak at 4.75%. This outlook makes variable rates still the best mortgage alternative, if you can qualify at the new qualifying rate of 6.25%! I believe variable rate mortgages are especially well suited for those who combine them with the use of prepayment privileges.

The recent housing price jump in Canada has been fueled by this past year's low interest rates and the perception of a return to stability. Since interest costs end up being more than the purchase price of a house over the course of most long-term mortgages, the rate drops have been equivalent to a huge drop in prices.

The wild card now is the credit crisis in southern Europe. If the European Union is able to support its weaker members sufficiently, we will continue on the slow growth path we have been looking forward to or better. It is of course very complicated to judge these dilemmas, but there better be some very clear economic arguments made to the tax payers in strong European economies why they should spend their savings to support the liberal policies (or economic leadership vacuum?) of their cousins (e.g. some Greek government union members enjoy retirement benefits beginning more than five years younger than in Germany!).

If the European financial crisis grows it could create another Arctic cold snap for the world and could result in higher interest rates here in Canada. Major investors will once again abandon mortgage securities in favor of Treasury bills like they did in 2007 and 2008. The result was rising fixed rates and variable mortgage rates going from deep discounts to prime rate to premiums (i.e. from prime -.6% in early 2007 to prime plus 2% at the end of the year). Under this scenario, housing prices may well fall in Canada, again. Those who have bought or refinanced now, at current mortgage rates, will at least be better positioned to weather the storm.

Low Rates are Dead, Long Live Low Rates!

Layth Matthews, AMP, MBA, CIM — Sun, 18 Apr 2010 4:09:23 PM EST

Canadian fixed mortgage rates were on the rise again this week. Not so much as the last few weeks, but wafting up nevertheless.

It would be easy to accept these rate increases as a natural side effect of a rising economy. However, U.S. and Canadian unemployment is still very high so it's important to recognize that speculation about a booming recovery remains just that, speculation. Also, the new CMHC rules taking effect this coming week have driven demand for 5 year money. Last but not least, many variable rate mortgage borrowers have chosen to lock-in rates at this point which drives up demand for fixed mortgage capital and fixed mortgage rates with it too.

So the question is, are rates going up due to a lasting rise in demand for goods and capital (including human capital)? Or is it just a combination of speculation and regulatory restructuring that will soon be sobered by the many factors holding the economy down? These include high unemployment, high oil prices, high Canadian dollar exchange rate, and higher sales taxes.

One thing is for certain. The higher fixed rates go, the less pressure there will be on the Bank of Canada to raise the bank rate. We expect the bank rate to rise over the next 12 months, maybe 1%, but the combination of factors mentioned above suggest variable rates are still a safe bet.

For those who took variable rate mortgages at premiums to prime rate a year ago there is an opportunity now to refinance into variable rates at significant discounts to prime now. It is very easy to calculate the net gains after transaction costs from such a manoeuvre. Ask your Mortgage Advisor to evaluate your options.

Making the Rate Choice

Layth Matthews, AMP, MBA, CIM — Tue, 6 Apr 2010 5:58:40 AM EST

In preparation for launching RateMiser seven years ago I decided to see if there was any historical research supporting one mortgage strategy over another. I was pleasantly surprised to find Moshe Milevsky's Mortgage Financing: Floating your Way to Prosperity.

In that study, York University's Professor Milevsky looked back over 50 years of mortgage rates and discovered that a variable rate approach had outperformed a 5 year fixed mortgage strategy about 88% of the time and by a wide margin (read for yourself).

But that study was conducted over seven years ago, plus, we are now at what would appear to be the bottom of a rate cycle. So the question on everyone's mind is, "What about now?"

I believe that variable rate mortgages continue to represent the best option for those who can qualify for them and especially so for those who will use their rate savings to knock down their principle via voluntary pre-payment options available at most mortgage lenders.

Here are three of my reasons for thinking this way:

1. This economic recovery is not as strong as it looks. David Rosenberg, Chief Economist & Strategist at Gluskin Sheff and former Chief Economist at Merrill Lynch, points out that many of the jobs lost in this recession will not be coming back any time soon.

Furthermore, the length of time it is taking people to find new jobs is now much longer than usual, which suggests, along with falling wage rates in the United States, that people are accepting lesser jobs and lower pay to what they had before.

Since labor costs are the largest driver of inflation (around 65% someone once said), and inflation is the main driver of mortgage rates, there is little danger of an inflationary boom driving mortgage rates significantly higher for some time. My guess is prime rate may rise 1% or so over the next 12 months, but it is unlikely to rise much higher for some time unless many economic drivers change for the better.

2. Street Capital, a new Canadian mortgage lender with seasoned management, released yesterday a simple comparison of fixed and variable mortgage rates that illustrated that even if prime rate increases .25% per quarter for the next 12 quarters (3% over the next 3 years) a variable rate mortgage will still outperform a 5 year fixed mortgage at available rates today.

3. The demographics of North America have peaked. The baby boomers have switched focus to securing their quality of retirement vs securing their quality of life. This means that even though consumer debt has continued to expand under the pressures of the recession, boomer households are likely to be increasingly conservative, which will make more money available to mortgage lenders at lower cost.

Anyone who could reliably forecast interest rates would be richer than Bill Gates in no time. So since no one really knows what will happen next, my favorite strategy is just, "Take the lowest rate". Right now variable rate mortgages are significantly cheaper than fixed rates of any term.

Nevertheless, the variability of rates is hard to tolerate on the upside and no one could fault you for locking-in a mortgage rate at this stage in the economic cycle. We may all look back at these available fixed mortgage rates wistfully in a year or two.

If you are torn between variable and fixed, there is also the option of a 50/50 mortgage product where half your rate will be locked in and the other half will float.

Mortgage Rates Are Heading Higher

Layth Matthews, AMP, MBA, CIM — Mon, 29 Mar 2010 2:12:36 PM EST

The buzz on the street today is that the 3, 4, and 5 year mortgage rates are heading higher. Positive economic news has led to increasing competition for capital leading one major bank to raise its rates a full .6%. So the best 5 year fixed mortgage rates are likely to rise tomorrow from 3.69% to 4.29% or thereabouts.

Amazingly, these rate hikes are likely to be self perpetuating for a while. Sudden rate hikes like these will scare many variable rate borrowers to lock-in their rates. This will create further sudden demand for fixed rate mortgage capital which may drive rates up.

In addition to this, the new mortgage rules coming in April 19th. Will make the 5 year fixed mortgage rates the effective lowest rate available to those who cannot qualify for variable rates at the new required stress test level. This will further increase demand for 5 year money and could push fixed rates even higher.

Ironically, all these rate hikes and higher qualification standards will have a cooling effect on the economy and may actually serve to keep the Bank of Canada from having to raise their rates as much or as fast.

Consequently, there will be less pressure for prime rate and variable rates to rise. The new higher qualification standards for variable rate mortgages will serve to further reduce demand for short term money. So variable rate mortgages are likely to be made a bit more attractive for those who can qualify.

Summary

Fixed rates are rising today, but it is still too soon to be sure that these rate hikes are an indication of a trend toward higher rates across the board or just another speed bump for the economy to absorb.

Buyers (and Sellers) Beware - The New Mortgage Rules will Reduce Buying Power

Layth Matthews, AMP, MBA, CIM — Thu, 18 Mar 2010 8:14:32 PM EST

This month Finance Minister Jim Flaherty announced a set of new guidelines for the Canada Mortgage and Housing Corporation (CMHC) and its competitors (i.e. Genworth and AIG) that are about to change the rules of the housing game, significantly.

CMHC is the arm of the Canadian government that offers insurance to mortgage lenders against borrower default. This is meant to stimulate the economy by emboldening mortgage lenders to offer mortgages at the lowest rates to families with as little as 5% down. All "High Ratio" mortgages (mortgages larger than 80% of a home's value are termed High Ratio) are required to be insured by CMHC or it's competitors, with few exceptions.

The most significant changes coming into effect on April 19th apply to those who want to have the maximum buying power in the market place. Here is a list of the upcoming changes and their effects, as I understand them:

1. Borrowers choosing variable rate mortgages will now be required to qualify for the loans using a stress test that is almost 2% higher than it has been.

That is a much higher standard to pass and will force many borrowers to accept 5 year fixed mortgage rates, which are more than double the current variable rates (3.69% for 5 year fixed and 1.75% 5 year variable) or delay purchases in hopes they can qualify for the lower variable rates at a future date. We believe this rule will have greater impact in major urban areas and in provinces where homes are more expensive like BC.

2. Self-Employed borrowers who cannot verify income will have to put at least 10% down instead of 5%. And they will only be able to refinance up to 85% of their home's value.

3. Existing mortgage holders will only be able to refinance to 90% of their home's value instead of 95%.

4. Rental property buyers will have to put down a minimum of 20% up from 5-10% under the current rules.

So not only will rental property investors have to come up with an additional 10-15% down, they will also be able to use only 25% of the income to help them qualify for the mortgage vs what they can use now! This will disqualify a huge percentage of buyers in the small rental property market (1-4 units).

5. Only 50% of rental income from an income unit in the subject property or other rental properties owned will be allowed to be included in income for financing purposes. The income allowed will be used in a far more conservative way.

This means that the income from the income suite in your property will be of much less help for buyers who need the income to help them qualify for the mortgage - reducing their buying power, a lot!

6. Self-employed people with over 3 years in business for themselves will now have to prove their income more conventionally.

7. The good news is that for buyers who like five year fixed mortgages, very little will change.

Strategy Options

To qualify for a mortgage under the existing, more liberal mortgage rules you need only get a mortgage approval that has been also approved by a mortgage insurer (CMHC, Genworth, or AIG) for a specific property prior to April 19th.

Buyers who want the option of a variable rate mortgage or using rental income to help you qualify, or if you are self-employed and unsure you can prove your income, be aware that you may have much more buying power before the new rules take effect than after.

If you are planning to sell your home, you may want to list it sooner rather than later as you will find many more qualified buyers to greet you in the marketplace before mid-April. This applies doubly if you are selling a property with a legal income suite and triple if you are selling a 1-4 unit income property!

Please feel free to call your RateMiser Mortgage Advisor to find out what the new rules will mean to you.

http://www.ratemiser.ca/index.php/mortgage_advisors

Take the Lowest Rate! Why Variable Rate Mortgages are Still Looking Good.

Layth Matthews, AMP, MBA, CIM — Sat, 7 Nov 2009 5:07:33 PM EST

Home prices are perking up - and they better be! But the economy is still far behind, which is great news for variable rate mortgages.

If you are wondering how weak the economy is, consider this. Prime rate has fallen from 6.25% in November 07 to 4% in November 2008 to 2.25% in April of 2009 and has remained there to this day. (Source: Bank of Canada). The payment on a $300,000 mortgage with a 25 year amortization at prime rate has come down $658 per month or 33% ($1964 per month at the peak of rates to $1306 per month now) and housing prices have hardly moved.

Despite these huge reductions in the cost of a new house (interest costs are the better part of buying a house), new housing starts have fallen to 53% of where they were a year ago and home prices are still flat or down across the country. (Source CMHC)

The good news is that housing prices have not gone down significantly due to the valiant efforts of policy makers. The bad news is housing starts are an important leading indicator of future economic activity and housing starts are DOWN a lot!

All this plus strength in the Canadian Dollar and weakness in the job market, reduces inflationary pressures and frees the Bank of Canada to leave rates low for a long time.

Some are concerned that the current low rates could lead to another housing boom. But overall, that would be a nice problem to have, because we're going to need to generate employment somewhere and home construction will stir a lot of sectors of the economy. Even when the economy does begin to recover, the provincial and federal governments will be withdrawing their economic stimulus programs, which will keep a lid on excessive growth.

Bottom line is variable rate mortgages are still a very good way to ride out this stormy economy.