Now that rates are extremely low the IRD (interest rate differential) penalties are in full force.

Penalties from the big banks are calculated based on posted rates and discounts given at the creation of the mortgage.

They are calculated differently throughout the lenders. Most of the non-branch lenders use the rate on the mortgage, less the current rate of the term closest to what is remaining on your term, to calculate the differential.

The big banks calculate the differential. The first number is found by using the posted rate less your discount. The second is the current posted rate closest to what is remaining on your term less the original discount you received. The 2 numbers are subtracted and that is your differential. Sounds confusing.

For example;

Non branch lenders 5 year rate 2 years ago 4.99%

Big Banks posted rate 2 years ago 6.85% and discounted by 1.86% to equal 4.99%

Non Branch lenders current 3 year rate is 3.60%

Big Banks current posted 3 year rate is 4.1% less discount received 2 years ago, 1.86%, = 2.24%

That is a big difference when calculating a penalty.

For a $300,000 mortgage, the penalty for non branch lender, based on IRD of 4.99-3.60=1.39% is $12,500.

Same mortgage with HSBC is 4.99-2.24=1.75% is $24,750.

The discounts are higher with the longer term mortgages. So when they are used to calculate the penalties on shorter term mortgage rates the difference is substantial. That is how they tighten their grip on you. It limits your options.

The banks rarely explain this to you, and even if they did, there are very few people that would understand.

Options and knowledge are your friends. Using a bank limits them incredibly from the start of the mortgage to the finish because they are looking out for themselves.

They keep you because they limit your options by not giving you the knowledge. Using a broker like myself gives you both. I choose what is best for you with unlimited resources.

http://www.rbc.com/economics/market/pdf/house.pdf

You may have heard the report that RBC published and was televised Monday night. I have attached the link to the actual report below.

 RBC red flagged Vancouver due to the lack of affordability.

 Since when has Vancouver been affordable? Why red flag it now? Why is only there only negative news coming from the big banks.

The say affordability is decreasing in Vancouver and I guess that would transfer over to Victoria a little, if it were the case.

 The reasons they used are recent increasing rates and increasing values.

 The percentage of household income taken up by ownership costs is not as high as it was in 2007-08 and the market is softening, prices are reducing.

 The fixed rates have decreased almost a full percentage since they started increasing prime this summer. And even though Prime has gone up to 3%, the variable rate mortgages have stayed the same due to the better discounts that are being offered.

 6 months ago the big banks released a publication saying that Prime rate and fixed rates are going up, and fast. Banks do not make as much money on variable mortgages as they do fixed. Since then, fixed rates have decreased substantially and prime is increasing slowly, so far, but looks like it won’t be going anywhere anytime soon.

It is hard to take these types of articles seriously when it looks like they only have their own best interests in mind.

The Bank of Canada boosted the overnight rate by 25 basis points (bps) to 0.75% this morning and reiterated that the timing of further reductions in policy stimulus will be contingent on developments both within and outside of Canada. The rate hike was widely expected by financial markets. The Bank characterized domestic economic developments as “unfolding largely as expected” although policymakers trimmed back forecasts for 2010 and 2011 GDP growth while boosting 2012. The global recovery was characterized as proceeding although the need for balance sheet repair by households, banks and governments will likely “temper the pace of global growth” relative to the Bank’s previous forecast. The central bank noted that the policy response to the European sovereign-debt crisis has eased pressures in financial markets, although the implied fiscal restraint will act to slow growth.

Canada’s economic forecasts were altered, so 2010 growth is now forecasted at 3.5% from 3.7%, 2011 at 2.9% from 3.1% and 2012 at 2.2% from 1.9%. As a result, the Bank now expects the economy to return to full capacity at the end of 2011, rather than in the second quarter as was forecasted in April. The forecast changes reflect an updated forecast for the global economy and a slower expected profile for Canadian consumer spending. The Bank now expects business investment and net exports to make “a relatively larger contribution to growth.” More details will be available on Thursday, July 22, 2010 with the release of the Bank’s Monetary Policy Report.

The inflation profile is little changed according to the statement, with both the headline and core measures forecasted to “remain near 2% during the projection period.” The Bank said that it will, “look through the transitory effects on inflation” from the implementation of the HST in Ontario and BC.

Once again, the Bank highlighted that there is significant uncertainty about the economic outlook and that, even with the two 25 bps increases in the overnight rate, there remains “considerable monetary stimulus in place.” 

Recent Canadian economic reports have been a mixed bag, with exports, imports and manufacturing sales all posting gains in May while housing activity slowed from the blistering pace earlier in the year. Sifting through these reports, we remain comfortable with our forecast that the economy grew at a 3.0% annualized pace in the second quarter of 2010. Importantly, the data signals that the domestic economy has not buckled under the strains created by the European sovereign-debt crisis and the weaker tone in some of the U.S. reports. While the data point to GDP growth in the second quarter running at a pace that is one-half of the 6.1% surge in the first quarter of 2010, the near-record pop in employment in the quarter (226,600 jobs were created in April to June) is consistent with the economy maintaining its solid growth momentum. We forecast growth at an above-potential rate in the second half of the year with the unemployment rate gradually to decline. 

The Bank’s summer Business Outlook Survey, released last week, suggested that pressures on capacity are starting to emerge and an increasing number of businesses are ready to up prices. With the core inflation rate already running close to the mid-point of the 1% to 3% target range, we expect that policymakers will want to withdraw stimulus gradually to ensure that price pressures remain on target. In our minds, the domestic data are consistent with the Bank raising the overnight rate to 1% at the September fixed-action date and 1.25% by the end of the year.  External developments related to Europe’s sovereign-debt crisis and concerns about the pace of U.S. growth remain a risk to Canada’s growth outlook, thereby opening the door for the Bank of Canada stepping to the sidelines to assess the effect of its rate hikes later this year. Our base case forecast, however, is that the strength in Canada’s domestic economy will persist, meaning that the current “emergency” level of rates is no longer warranted. Our forecast is that the overnight rate will be 1.25% at the end of 2010 and 2.75% at the end of 2011, higher than the rates implied by the futures market.  

Dawn Desjardins, Assistant Chief Economist, RBC Economics

The market seems to be cooling off a little. I think that was the plan with the HST and CMHC changes. With the uncertainty in Europe and the economy moving forward gradually, it looks like the increase in Prime rate will be slow and steady over the next 18-24 months.

 The Victoria market has a large number of homes on the market, around 1000 over the average. Lots of listings mean more selection and a softening in the market.

 Fixed rates are holding steady. The last 3 weeks has seen the bond market decreasing slowly and 5 year fixed rates coming down slightly. Some lenders are still holding at 4.49%, while others have decreased to 4.29%.

 The variable rate mortgages are very attractive now. Prime minus .60% with the slow increase until the end of 2011 allows an opportunity to pay down your principle quickly in the beginning of the mortgage when usually the majority of your payment is interest.

With the chaos in Greece the world is thinking the problems may not be over and increasing rates may not be the best idea.

The Canadian economy created 108,700 jobs last month, more than four times as many as expected. This is the largest monthly gain on record, this should cause the Bank of Canada to think strongly about increasing rates.

The Financial Post is suggesting no increases and the Globe and Mail is suggesting increasing sooner than later.

The official word from the Bank of Canada is that they are not guaranteeing they will hold their lending rate until July.

Whether the Bank of Canada increases rates in June or July, it looks like the predictions from the big banks on a hard and fast increase may have been premature.

We still seem to be in a time where all long term predictions only last a couple months or even weeks.

The bond market has slumped a little this week due to the European situation and one lender has decreased their 5 year rate, but seeing 5 year rates below 4% again is very unlikely,

A slow increase over the next 2 years may be what we see.

By Derek Scott, The Canadian Press

VANCOUVER, B.C. – Buying a house in the hot housing markets of Vancouver, Toronto and other major cities in recent years has been a possible dream for some first-time homebuyers only because many of those houses had suites they could rent out.

But new rules coming into effect April 19 will all but wipe out that advantage in the eyes of banks handing out mortgages.

“It makes it much more difficult for people with rental properties to qualify for their own mortgage on their personal residence,” said Vancouver mortgage specialist Patrick Mulhern.

The new regulations are designed to prevent speculation in the market, said Jack Aubrey, of the Canada Mortgage and Housing Corporation.

But Vancouver mortgage agent Mike Averbach said the new rules will do little to prevent investors from gambling in the housing market.

“They haven’t decreased risk,” he said. “They’re just not allowing you to use the income.”

Currently, landlords can use 80 per cent of their rental income to offset monthly mortgage payments. That means, if they receive $1,000 per month in rental income, they can use $800 to offset a $1,200 mortgage payment, leaving only $400 to be debt financed.

But under the new rule, only 50 per cent of a landlord’s rental income will be used. Even then, that money will not be used to offset their monthly mortgage payment. It will be added to their total income, forcing them to qualify for the entire monthly mortgage.

For instance, a person earning $100,000 per year in regular income plus $12,000 per year in rental income will have a total income of $106,000 with which to qualify for a mortgage on their own home.

Rental income is essential for many of his clients, Averbach said.

In cities like Vancouver, where the average home price in February was more than $662,000, rental offset is the only way many people can qualify for a mortgage and the new rules will keep many of his clients in condos rather than houses, he said.

“Putting a renter in your basement is not speculative, it’s reality,” he said. “It helps you pay your mortgage.”

The rule changes also make it more difficult for people to buy a property separate property to use as a revenue generator.

CMHC will no longer offer high-ratio financing on rental property not lived in by the owner. That means someone looking to buy a house as a rental investment will have to come up with a 20-per-cent down payment on the property, as opposed to five per cent before the rules changed.

The changes haven’t worried groups advocating for tenants.

Jeordie Dent, of the Federation of Metro Tenants’ Association in Toronto, where vacancy and availability rates have dropped over the last year, said he doesn’t see a negative impact on renters.

Instead, he said his group welcomes the changes.

Dent said too many people become landlords without the financial or intellectual wherewithal to properly manage their properties.

“Anything that strengthens mortgage rules, from our perspective, is a good thing.”

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.

The ongoing global economic recovery is being driven largely by strong domestic demand growth in many emerging-market economies and supported in advanced economies by exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.

The level of economic activity in Canada has been slightly higher than the Bank had projected in its January Monetary Policy Report (MPR). The economy grew at an annual rate of 5 per cent in the fourth quarter of 2009, spurred by vigorous domestic spending and further recovery in exports. The underlying factors supporting Canada’s recovery are largely unchanged – policy stimulus, increased confidence, improved financial conditions, global growth, and higher terms of trade. At the same time, the persistent strength of the Canadian dollar and the low absolute level of U.S. demand continue to act as significant drags on economic activity in Canada.

Core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity. The outlook for inflation should continue to reflect the combined influences of stronger domestic demand, slowing wage growth, and overall excess supply.

Conditional on the current outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.

The risks to the outlook for inflation continue to be those outlined in the January MPR. On the upside, the main risks are stronger-than-projected global and domestic demand. On the downside, the main risks are a more protracted global recovery and persistent strength of the Canadian dollar. The Bank judges that the main macroeconomic risks to the inflation projection are roughly balanced.

Jim Flaherty Tuesday announced tighter lending standards for mortgages, saying that while the housing market is “healthy” the moves are needed to “help prevent negative trends from developing.” Under the new rules, all borrowers will need to meet standards for 5-year fixed-rate mortgages regardless of whether they’re seeking a loan with a lower rate and shorter term.

Also, the government is lowering the maximum amount Canadians can withdraw when refinancing to 90 per cent of the value of their homes, from the current 95 per cent, and requiring a 20 per cent down payment for government-backed mortgage insurance on “speculative” investment properties.“There are no definitive signs of a housing bubble,” Mr. Flaherty said. “We think we’re being pro-active in the three steps we’re taking today.”Frank Techar, the President of Personal and Commercial Banking for BMO Bank of Montreal, welcomed the announcement.“While we do not believe that Canada faces a housing bubble, we fully support the minister’s actions,” Mr. Techar said in a statement. “Given the prospect of higher interest rates and the recent run-up in housing prices in some markets across Canada, the measures announced today are prudent. Currently, we require high ratio mortgages to be able to qualify using the 5 year rate.” In a release, the finance department indicated that the three new changes to the mortgage insurance guarantee rules are intended to take effect April 19, 2010.  In reference to the tightening of re-financing rules, Mr. Flaherty said this will encourage Canadians to build equity in their homes instead of tapping that equity as a source of cash. “This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up. We are encouraging people to build equity over time, using home ownership as an effective way to save, rather than as a vehicle for quick cash,” he said.  In his comments on the third measure, Mr. Flaherty said the hike in minimum down payments for such properties will help keep prices from climbing too high. “We will require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner occupied properties purchased for speculation. This will discourage the kind of reckless real estate speculation that can drive prices to unsustainable  levels which does not serve Canadian home buyers,” he said. “We’re not aiming here at investment properties,” Mr. Flaherty added. “What we’re getting at is the speculation in multiple-condo markets, in particular.”  CIBC economist Avery Shenfeld said “these look to be very well targeted at the one area of concern that we have, which is that low rates are making larger variable rate mortgages look more affordable than they really are on a long term basis.” The moves send an appropriate message to borrowers about debt, he said. While the rules don’t take effect yet, Mr. Shenfeld suggested that the banks might begin adopting them earlier. And they could take a little bit of steam out of the market, he said. “It may be part of a cooling that we’ll see in house price appreciation,” he said. “We were pushing into house prices that were running a bit ahead of rental rates and income fundamentals – not to the point that we feared a huge house price crash, but to the point that it might be time to head-off such risks.”