Bank of Canada Warns Rates May Climb Even Higher Than “Neutral”

Latest News Michael Distefano 26 Apr

  High inflation has become such a risk to the economy, the central bank will do anything to slow it. That might include raising interest rates higher than already aggressive forecasts have called. This was the message from the Bank of Canada (BoC) at the Standing Committee on Finance today. The central bank Governor made it clear they will act “forcefully” to control inflation, which won’t be coming down by itself. That can mean much higher mortgage rates than forecast.

What Is A Neutral Policy Rate?
The neutral policy rate is the short-term interest rate where output and inflation are stable. When the overnight rate is below this point, it’s expansionary and helps to stimulate demand for goods and drive inflation. Above the neutral policy rate and the central bank is placing a drag on demand to help achieve the target rate of inflation.

What is the actual number for the neutral rate? That’s a little more difficult to pin down, but the BoC raised its forecast to a range of 2.00% to 3.00% back in December. Prior to December, it was forecast between 1.75% and 2.75%. The delay in tackling inflation helped the neutral rate climb higher.

Canada May Need Rates Above Neutral To Cool Inflation
The BoC suddenly changed its tune on transitory inflation that will resolve on its own. For the second time this year, the central bank said they will “forcefully” tackle high inflation if needed. Governor Macklem also emphasized the central bank had an inflation target to maintain, not one for interest rates.

No upper bound for interest rates is important to understand since the BoC can go above the neutral policy rate to control inflation. At least for a brief period.

“…we may need to take rates modestly above neutral for a period to bring demand and supply back into balance and inflation back to target,” said Governor Macklem in his opening remarks.

Similarly, if inflation is cooling faster than expected, they said they would pause hikes. With the central bank warning, “excess demand” is a big issue, a strong negative shock would need to appear before that becomes an option. Though anything is possible in the “new normal,” so don’t totally discount the idea.

What does this mean? Ultimately, interest rates (and mortgages) can go even higher than previously thought. Most forecasts are based on the BoC achieving the neutral rate, which many forecasts assume will be hit this year. If the central bank needs to go above the neutral policy rate, the aggressive forecast from banks like Scotiabank would seem quite tame in comparison.

For more information on how you can prepare for rising rates and lock in now call Mike Distefano at 1 905 246 5363 or email me at dlcbtbniagara@gmail.com

Michael Distefano
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Don’t Fall into the Appraisal Trap and bidding war on your home purchase

Mortgage Tips Michael Distefano 31 Mar

Armed with a hard-earned down payment, pre-approval from a lender, and a wish-list of what you “must” have in your dream property, window shopping for homes can be an exciting experience.

And then it happens. You find the perfect place in your desired neighborhood. Unfortunately, there are 10 others who have also fallen in love with “your” new home. And so, the bidding war begins.

Let’s say you win that battle, with the final selling price magically within your pre-approved amount as set by your lender. It is at this stage that buyers believe the hard work is over, and it is only a matter of signing a few papers to close the mortgage so you can finally get the keys to your new home. But that is not the case for some.

If an appointed appraiser assesses that the property value is less than what you offered in a high-stakes bidding war, you could be in trouble. Should this happen, your lender will only loan you as much as the home is actually valued at (minus your down payment) – not what they’d originally offered in your pre-approval.

For example, a buyer has a $30,000 (5%) down payment and is approved for a mortgage of $570,000. He/She finds a property, with a $600,000 price tag. The appraiser, however, believes the property to be only worth $575,000.

What does this mean for the buyer?
The maximum mortgage amount that the lender will provide on this new appraised value is :
95% of $575,000 = $546,250

The total amount required to close this deal is: $600,000 – $546,250 = $53,750

Amount needed to close deal – buyer down payment = Additional funds required
$53,750,000 – $30,000 = $23,750

The buyer only intended to put down $30,000 but now needs an additional $23,750 to secure a mortgage for this transaction. At this point, you have two options: borrow money from someone, or be forced to walk away from the deal (and risk losing your deposit, in the process). Not having the resources in this situation is what we refer to as “appraisal risk”.

So, how can buyers avoid this nightmare?

First, you should avoid overpaying. But how can you do this in a competitive market? A good real estate agent should understand the “real” value of the property and the neighborhood you want to buy in.

Having a larger down payment can also reduce your risk in appraisal cases. You can put less money down and use the extra cash to make up the shortfall. However, on the flip side, this means you might have to pay a higher CMHC insurance premium (premiums are mandatory for down payments under 20% and are charged in 5% tiers).

The big trouble arises when a buyer only has a 5% down payment saved and makes a firm offer to buy because then there is little room to get extra funds from their own sources; this is when a buyer has an extreme appraisal risk.

For that reason, we would never recommend any buyer enter a bidding war with only a 5% down payment. And, if they do, we suggest having a financing condition within the deal. While this puts the buyer at a disadvantage to those with a “clean” (condition-free) offer in the bidding war, it is the risk they, unfortunately, have to take if they really want that property.

Even buyers at the 20% down payment threshold face appraisal risk in bidding wars. If an appraisal comes in lower than the purchase price, the buyer then has to put down less in order to make up the shortfall, and purchase CMHC insurance when they otherwise would not have had to.

Your broker or agent cannot control what an independent appraiser values a property at. Neither can buyers. Knowing the risks before making a firm offer in a bidding war, however, can help you prepare and plan for every outcome.

Michael Distefano
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Self-employed increasingly turning to private lenders for mortgages

General Michael Distefano 25 Apr

by Canadian Press 25 Apr 2019

Self-employed increasingly turning to private lenders for mortgages

The self-employed are among the growing number of Canadians turning to private lenders in order to obtain a mortgage.
While many prospective homeowners are driven to alternate lenders because of government-mandated stress tests and poor credit scores, the self-employed often have additional burdens to overcome in proving their income.
“There’s more and more people seeking private loans than ever before and that’s a direct result of government making it more and more difficult to qualify,” says Dan Caird, a mortgage agent with Dominion Lending Centres.
According to the Bank of Canada, private lenders have doubled their share of the mortgage market since 2015, accounting for eight per cent of Canadian mortgages in 2018, and an even greater share in the hot real estate market of Toronto.
These lenders are less concerned about income and more focused on the property’s value in case they have to foreclose. The tradeoff is higher interest rates and fees.
Still, the option can be helpful for the self-employed who expense as much as they can in order to reduce their taxable income and who have a strategy to beef up their credit score with a goal of returning to a traditional lender.
Caird said it’s usually more financially advantageous to “expense the heck out your business” and show less income.
“Sure you’re going to pay a half a per cent, a per cent, sometimes two to three per cent 1/8more 3/8 on your mortgage but …they usually end up coming out ahead by claiming less income and just paying a bit more on the mortgage,” he said in an interview.
However, the writeoffs make it harder for lenders to obtain the 35 to 44 per cent debt-to-income ratio sought by traditional lenders.
Proving a sufficient track record of income to qualify for a mortgage can be the biggest challenge for people who work for themselves.
“Assuming a self-employed borrower had great credit and ample equity, we used to be able to simply state their income to the bank and show a notice of assessment to prove no taxes owing,” said Robert McLister, found of mortgage news website RateSpy.com
“Those days are long gone.”
The government now wants verifiable proof of true earnings while the stress test makes the hurdle even higher by requiring almost 20 per cent more provable income to qualify for the same mortgage available in 2017, he said.
That has pushed more people to alternate lenders.
“Self-employed mortgages without traditional proof of income are a different animal from your cookie cutter AAA bank mortgage,” McLister added.
The Canada Mortgage and Housing Corp. is trying to ease the paperwork required to obtain mortgage loan insurance, said Carla Staresina, vice-president risk management, strategy and products.
It introduced changes last October that suggest additional factors lenders could consider if the borrower has been operating their business for less than two years, including having sufficient cash reserves, predictable earnings, acquisition of an established business and previous training and education. It is also encouraging acceptance of a broader ranger of documents.
“Our aspiration really is to make sure everyone in Canada has a home they can afford and that meets their needs,” Staresina said from Ottawa.
“We know self-employed Canadians make up about 15 per cent of Canada’s labour force and so we want to make sure that any difficulty that they have in qualifying for a mortgage is mitigated and that we’ve got some options for them.”
McLister said the program will help “at the margins,” particularly those who recently started a business or bought an established operation.
Caird said there’s been some other steps in the right direction. He pointed to a new product from the Bank of Nova Scotia that allows incorporated companies to use retained earnings in the business to help applicants qualify.
Genworth Canada and Canada Guaranty also have programs to help self-employed borrowers, but require the business be open for at least two years.
The mortgage broker’s task is to convince lenders that the borrower is a good credit risk by adding back specific deducted expenses to net income to improve the debt-to-income calculation, said Caird.
While having a sound credit history is very helpful, mortgages can still be obtained for those with less-than-stellar records, for a cost.
Three essentials for borrowers are to have up-to-date taxes, be organized and consult a mortgage broker long before the mortgage is required.
“If your taxes aren’t up to date it’s going to be next to impossible to get a lender to give you a mortgage at any sort of reasonable rate or term.”

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