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Bank of Canada increases overnight rate target to 1 ¾ per cent

The global economic outlook remains solid. The US economy is especially robust and is expected to moderate over the projection horizon, as forecast in the Bank’s July Monetary Policy Report (MPR). The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been… [more]

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Annual inflation rate accelerates to 2.2%

Canada’s Inflation Rate Higher than Expected

A recent iPOLITICS article reports the annual inflation rate accelerated to 2.2%, which is above the Bank of Canada’s expected target. Stephen Poloz, the Bank of Canada’s governor, stated that despite the three interest rate hikes since last summer he maintained the current rate as the Bank watches the current trade related uncertainties out of the USA.

Read the full article by Andy Blattchford published on Mar 23, 2018

In other news…

Real estate sales are cratering around the GTA. And perhaps all of Ontario.

The tide seems to be turning in the GTA from a seller’s market to a buyer’s market. Some real estate brokers have reported that houses are staying on the market longer. Stubborn sellers, holding out for higher prices, are starting to realize they better take what they can get now rather than less later.

After years of rising prices and a several months of total insanity across Ontario, the housing market seems to be stabilizing. In January 2018 home sales in Canada dropped rapidly by 14.5% compared to the previous month. This was the biggest single-month decline in almost a decade. The drop was mainly caused by actions in the GTA where home sales fell off 26.6%. This drop has been similarly reflected in other communities across Ontario.

Will this downward turn in prices continue into a long term slump or rebound? The experts have their opinions one way or the other. But the fact is prices today are lower and may present a buying opportunity for home buyers that just was not available a few months back.

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Bank of Canada Raises Over-Night Rate: Jan 2018

Today, the Bank of Canada elected to increase its target for the overnight rate to 1.25%, up from 1%. Why? The economy is near full capacity, we are near the target inflation rate, and  recent financial data suggests it’s time to slow down.

With estimates by the Bank that the GDP growth in 2017 reached 3.0%, the Bank feels this will drop in 2018 and thus the overnight rate may remain stable for a while and perhaps even fall if predictions come true later in the year.

The current state of the NAFTA negotiations is also causing some concerns relative to future economic predictions. A down tick in trade could vastly impact business investment in Canada. Even with this uncertainty there is positive news. The lower business capital gains rate in the US has freed up cash for more investment by US companies and Canada stands to gain from export opportunities.

With all the uncertainty, the Bank of Canada recognizes however that higher interest rates may be warranted over time if warranted. The Bank however does not want to be the cause of any stagnation over time or cause the inflation rate to falter.

The Bank states it will “remain cautious in considering future policy adjustments” carefully analyzing the data to evaluate “the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.”

The Banks of Canada’s next interest rate statement is set for March 7th. You can read the full Bank of Canada rate hike announcement here.

I welcome any questions about how these recent interest rate changes can possibly impact your home buying or mortgage needs, so please don’t hesitate to give me a phone call or drop me an email. I’m here to help you.

At Your Service,

Michael J Preston

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2018 Mortgage Rule Changes in Canada.

Tighter Rules Could Mean No Mortgage for Some Canadians.

The new mortgage “stress test” came into effect on Jan. 1, 2018 in Canada requiring virtually all prospective home buyers to meet tighter lending restrictions. According to some estimates, the tighter qualifying standard could shut out some 10% of lower down payment buyers compared to regulations in 2017.

Toronto and Vancouver will likely see the biggest impact from the new restrictions but the effects will no doubt ripple into smaller communities.

The new “stress test” will affect home buyers applying for mortgages that are less than 80 per cent of the value of the property they wish to purchase. Borrowers will have to qualify for rates that are higher than the contractual mortgage rate they would actually be eligible to assume. This effectively reduces the buying power of a consumer with an uninsured mortgage by about 20 per cent, according to some industry experts.

The Office of the Superintendent of Financial Institutions Canada (OSFI) published the final version of Guideline B-20 − Residential Mortgage Underwriting Practices and Procedures.

OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages.

  • Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.

These rules assure that all mortgage holders can cope with any unforeseen rising interest rates and are now similar to those rules already in effect for borrowers with down payments under 20 per cent.

Many concerns were submitted as comments and responses were issues by OSFI on topics such as mortgage renewal qualifications. These comments can be reviewed here on the OFSI website.

“These revisions to Guideline B-20 reinforce a strong and prudent regulatory regime for residential mortgage underwriting in Canada,” said Superintendent Jeremy Rudin.

Paul Taylor, President and CEO of the Mortgage Professionals Canada, is concerned about how much these changes will impact the real estate market and suggests that it could stress smaller communities. Taylor says, “Reducing the number of people who can afford those homes now is only going to exacerbate the problem,” He goes on to say, “When house prices come down, you can potentially create a recessionary environment in pockets across the country.”

Time will tell, probably sooner than later, what effects these mortgage qualification rules will bring about for Canadians.

If we can help you with obtaining a mortgage please contact Michael J Preston at 705-309-1747.

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Major Changes to Canada’s Housing Mortgage Rules

percent sign - mortgagesIn an effort to keep Canadians from taking on a larger mortgage than they can afford the Liberal government has announced significant changes to the mortgage qualification rules. Finance Minister Bill Morneau also noted these changes should help stem some of the concerns about foreign buyers buying and flipping houses such that they drive up housing costs for Canadians.

Beginning on October 17, 2017, the stress test used to approve high-ratio mortgages will be applied to every new insured mortgage, including buyers who have more than 20% down payment. This change assures lenders that the borrower will still be able to afford the mortgage payments even if the interest rate increases

Another aspect of the change requires that the home buyer will be spending no more than 39% of their income on house-related costs like the mortgage payments, heat, and taxes. The TDS ratio must not be more than 44%.

The home borrower would not only have to qualify at the lenders’ interest rate but also at the Bank of Canada’s five-year fixed posted mortgage rate, which is an average of the posted rates of the big six banks in Canada.

These changes affect a broad range of mortgage consumers assuring safety for both the borrowers and lenders in the midst of the current low-interest rate market.

Further changes are outlined in the Globe and Mail article here

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ECONOMY NEARS FULL EMPLOYMENT IN 2017

Excerpt on Economy Posting by DR. SHERRY COOPER,
Chief Economist, Dominion Lending Centres

“The Canadian economy has grown at a stronger-than-expected annual rate of 3.7% in the past year, taking the jobless rate down to its lowest level in nearly a decade. With Canada’s economy the strongest in the Group of Seven countries, Ottawa now projects much smaller deficits than it did in March. The Liberal government cut its deficit projection for the fiscal year that ends March 31 to just under $20.0 billion, down from $28.5 billion in the March budget. It now expects a cumulative deficit over the coming five fiscal years of $86.5 billion, compared with $120 billion previously.

Finance Minister Bill Morneau announced new spending today totalling $7.7 billion over six years, bringing the total new spending since the March budget to $19.1 billion over six years. This additional stimulus comes as the economy is running far faster than its long-run potential noninflationary pace, rapidly approaching full capacity.” Read More

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Mortgage Rules Change

OSFI extends ‘stress test’ to all new mortgages
  • The Office of the Superintendent of Financial Institutions (OSFI) released revised “B-20” guidelines for residential mortgage underwriting at federally regulated financial institutions. As was widely expected, the updated ‘stress test’  will be applied to all new mortgages beginning on January 1, 2018. Currently, the test applies only to mortgages requiring insurance (i.e. those with low down payments) and those whose term is less than five years.
  • This change requires that borrowers qualify for mortgages at the greater of the Bank of Canada’s five-year benchmark rate or the contracted rate plus 200 basis points. For reference, as of this morning, the Bank of Canada posted rate was 4.89%. It should be noted that OSFI will not apply the more stringent requirements in the case of mortgage renewal.
  • While the extension of qualification guidelines will likely draw the most attention, OSFI introduced two other changes:
    • Loan-to-value limits must be established and lenders will be required to ensure that they “are reflective of risk and are updated as housing markets and the economic environment evolve”
    • Lending arrangements designed to get around loan-to-value limits are restricted with the updated guideline explicitly forbidding ‘co-lending’ or ‘bundling’ arrangements.
Key Implications
  • As expected, OSFI has expanded the scope of the ‘stress test’ to include anyone taking out a mortgage at a federally regulated institution regardless of the term and whether they are insured. Perhaps underscoring the logic behind the change, OSFI bank data for August of this year showed insured mortgages (which were already subject to the stress test) were down 4.5% year-on-year, while uninsured mortgage credit grew 17.3%. While this is partly related to the rising prices of Canadian real estate, with more and more of it priced above the insurance caps, it also likely reflects the skew stemming from the past stress test requirements. As such, today’s change, alongside the explicit guidance around co-lending arrangements, will together help address the shift as far as those borrowing from federally regulated institutions.  
  • As discussed in our regional housing outlook, broadening the stress test will likely further slow housing activity, depressing demand by 5% to 10% once implemented, with some pull-forward of activity likely to take place ahead of the January 1st implementation date. Price growth will also be impacted, with these changes expected to exert a drag of between 2% and 4% over 2018. On balance, these changes should help enhance the resilience of the Canadian banking system in a rising interest rate environment.