Interest Rate Increase – Bank of Canada

The Bank of Canada raised their rates today to .5% which is up from .25%.  This is the first time since 2007 that the rates have increased.  You will most likely see the banks in canada change the prime rate to 2.50% from 2.25% which it has been at for some time.

Here’s a full article from Today’s Globe and Mail…

The Bank of Canada raised its benchmark interest rate for the first time since 2007, saying inflation is unfolding as expected and that spillover from the European debt crisis has been limited, while stressing there remains “considerable uncertainty” about an “increasingly uneven” global recovery.

With his much anticipated decision to lift the central bank’s overnight rate by one-quarter of a percentage point to 0.5 per cent after more than a year at a record low level, Governor Mark Carney has become the first central banker in the Group of Seven to tighten since the financial crisis and recession began in 2008.

In a statement on the move, however, Mr. Carney and his rate-setting panel sought to emphasize that investors should not necessarily interpret the increase as the first in an uninterrupted series.

“This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending and the uneven global recovery,” the central bank said Tuesday. “Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.”

Economists interpreted the Bank of Canada’s statement as a bucket of cold water on any remaining expectations for an aggressive tightening campaign, as policy makers nervously monitor economic and financial-market developments in the weeks leading up to their next decision on July 20.

“Those looking for a clear roadmap (or GPS) for the Bank’s tightening path will be sorely disappointed by today’s cautious statement,’’ said Doug Porter, deputy chief economist at BMO Nesbitt Burns in Toronto. “The Bank has left its options wide open even on the July rate decision.’’

Markets clearly took the same message, with bond yields dropping and the Canadian dollar slipping after the decision, “definitely not standard fare for a rate hike day,” Mr. Porter noted.

The loonie fell 0.8 per cent against the U.S. dollar as of 9:45 a.m. in Toronto, while the yield on two-year Canadian government bonds retreated to 1.71 per cent from yesterday’s 1.82 per cent.

Eric Lascelles, chief macro strategist with TD Securities, said while he expects a second straight 25-basis-point increase on July 20, “barring significant negative developments either domestically or globally,” further moves won’t be any bigger.

“What is clear is that despite the ultra-low level of the overnight rate, the present environment is not one conducive to outsized rate hikes of the 50-basis-point or larger variety,” Mr. Lascelles said.

The central bank’s statement touched on themes that will no doubt be front-and-centre at the Group of 20 leaders’ meeting in Toronto at the end of June, where Canadian officials have said they will be pushing for continued efforts to smooth out the global imbalances that exacerbated the slump that much of the world is still clawing out of.

“The required rebalancing of global growth has not yet materialized,” the bank said, contrasting “strong momentum” in emerging markets with recoveries in economies such as the United States and Japan that remains “heavily dependent” on low interest rates and government spending.

“In general, broad forces of household, bank, and sovereign deleveraging will add to the variability, and temper the pace, of global growth,”’ policy makers said.

The bank flagged the possibility of “renewed weakness’’ in Europe, where drastic spending cuts and higher borrowing costs will be the likely result of continent-wide debt problems, but said that, so far, the effects of the crisis on Canada have been “limited to a modest fall in commodity prices’’ and somewhat tighter financial conditions.

The Canadian economy, which on Monday posted a whopping 6.1-per-cent annualized growth rate for the first quarter – the fastest in more than a decade – is “unfolding largely as expected,’’ the bank said, led mostly by a hot housing market, higher incomes and a labour-market recovery that have helped fuel consumer spending.

Still, the central bank suggested that household spending and the economy will slow in the coming months as consumers deal with higher borrowing costs and try to limit or reduce their debt loads and as government stimulus spending fades. As a result, an “anticipated pickup in business investment will be important for a more balanced recovery,’’ the bank said.

Inflation, which the central bank has been watching closely for months, has been in line with policy makers’ projections to exceed 2 per cent this year and reflects a combination of strong domestic demand, slowing wage increases and “excess supply’’ leftover from the recession.

The central bank also said it is making a technical, yet significant, change to re-establish “normal functioning’’ of the overnight market, whereby its benchmark will return to halfway between the rate it pays to chartered banks to hold deposits and the amount that it charges private-sector lenders for loans.

What is IRD?

Hello! With interest rates being so low over the past year, many customers have tried to refinance their mortgages but have been faced with one dreadful word. IRD. So today I wanted to talk a little bit about IRD, what it stands for and what it means. There’s an old saying, “The lowest rate will save you hundreds, but the wrong term can cost you thousands.”

So what is IRD? It stands for Interest Rate Differential and it’s designed to compensate a lender when a borrower breaks the term of their mortgage by paying it out prior to the maturity date or early renewing at current interest rates. Banks act as intermediaries between borrowers and savers. So for example, a savers 5 year term deposit can be used to fund a borrowers 5 year mortgage. The bank will pay the saver interest but will collect interest from the borrower. If you request to end your mortgage early, the bank still has to pay interest on the term deposit. Where the bank cannot lend the funds at the same or better interest rate, an IRD is charged.

So how is it calculated? It is calculated based on the difference between the mortgage interest rate and the interest rate that the bank could lend out the funds for the remaining term. So as you can see, the term is very important. The longer term remaining, the higher the potential IRD. The most important thing to note is that the interest rate for the remaining term is called the prevailing interest rate and is based on the posted interest rate for the term most closely matching the remaining term minus the interest rate discount that you last received. Where the prevailing interest rate is equal or higher than the interest rate of your mortgage, then there may be no IRD. The best thing to do is to sit down with your financial institution to find out how they calulate their IRD and note that it can change on a daily basis.

Most lenders including TD Canada Trust offer mortgages that are open and closed to prepayment. Mortgages that are open to prepayment can usually early renew or payout without an IRD charge, but I would double check with your lender as different rules may apply. We also offer mortgages that are convertible to another term. These mortgages can be early renewed without an IRD, but not paid out. All other mortgages are subject to an IRD charge.

So as you can see, your term can have a far greater impact on interest cost than the upfront interest rate. The wrong term can cost you a lot of money if interest rates differ from your assumptions or if you  need to break your term early. My advice? Talk to a mortgage specialist who can walk you through the different options and scenarios suitable to your needs and take your time. You want to get the right term the first time. No matter what type of mortgage financing you are looking for, it makes sense to speak to me first. Let me know if you have any questions. Thank you!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

Understanding HELOC’s

Hi everybody! Its Josephine, your Mobile Mortgage Specialist with TD Canada Trust. With recent mortgage rates on a roller coaster ride and expected rate hikes from the BOC, choosing between and fixed or variable mortgage can be a difficult decision. That’s why I wanted to touch on a product that not everybody is familiar with and that is HELOC’s. First off, some of you may be wondering what a HELOC is. It stands for Home Equity Line of Credit. Its a flexible mortgage alternative using the equity available in your home to take advantage of a low variable interest rate with continuing access to funds. So how can it give you the best of both worlds? It comes with a security of a fixed rate feature at conventional mortgage rates. Before I show you what this looks like, there are two things I want to point out. This product is only available on a conventional basis. In other words, you must have at least 20% down pyament or 20% available equity in the home. Secondly, the maximum amortization of the fixed rate feature is 25 years versus 35 years on a standard mortgage product. So what does this look like? Lets say for example you applied for a Home Equity Line of Credit in the amount of $200,000. You like the variable rate and your spouse wants a fixed rate, or you’re on your own but you can’t decide. Your mortgage can look like this:

• $100,000 in a 3 year fixed
• $100,000 at the variable rate

                        or

• $50,000 in a 3 year fixed
• $50,000 in a 5 year fixed
• $100,000 at the variable rate

Since the Home Equity Line of Credit is a revolving product, you may want to review your spending habits before applying for this product because without an established repayment term, you may never get it paid down. That’s just a side note. Unlike the 5 year variable closed mortgage which is currently priced below the bank prime, Home Equity Lines of Credit are priced above the bank’s prime lending rate. The trade off? Interest only payments on the revolving variable portion and the flexibility to lock in all or parts of the outstanding balance between 1-5 year fixed mortgages rates…at a discount of course. Also, if you think you may have a need to re-borrow in the future for things like renovations or to consolidate higher interest debts, this is a good choice to consider. Since nobody can really predict how rates are going to move over the next five years, this product is a good form of managing interest rate risk. Diversifying your interest rates as a borrower can benefit you just like it benefits investors who don’t put all their eggs in one basket. You can review TD’s latest long term interest rate forecast here. Remember, no matter what type of mortgage financing you are looking for, it makes sense to speak to me first. Thank you!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

Say Goodbye To Your Mortgage Faster

According to a recent survey, one in four Canadians over the age of 50, who have at least $100,000 in assets, retired with some form of debt. Nearly 25% had a mortgage on their principal residence and 28% said they took on more debt after retirement. Scary. Today I wanted to talk about how you can own your home faster and save money in the process. Why? So you can retire debt free and focus on doing the things you want to do. No matter what type of mortgage financing you are looking for, it makes sense to speak to me first.

Strategy #1
Increase the frequency of your payments
If you’re paying your mortgage on a monthly basis, switch your payments to bi-weekly. As a result, you will actually make 26 payments a year. This will help you save money and reduce your amortization.

Strategy #2
Take advantage of increased payment options
TD Canada Trust customers can increase their payments by up to 100% of their regular payment amount at any time throughout the term of the mortgage. You may be suprised by how easy it is to adjust your lifestlye to a slight increase in your mortgage payments.

Strategy#3
Take advantage of lump sum payments
In Addition to increased payment options, TD offers you the opportunity to make lump sum payments on your mortgage for up to 15% of your original mortgage amount per year on a closed term. Annual bonuses or tax refunds provide great oppotrunities to take advantage of this option. Even an annual lump sum payment of 2% will make a huge difference.

Strategy #4
Take a shorter amortization
In addition to the strategies above, you may choose to shorten your amortization from 25 years to 10, 15 or 20 years instead. The result is a slightly higher mortgage payment but significant interest savings over time.

Strategy#5
Pay the same amount
For those of you who decide to take on a variable mortgage, adjust your monthly payments to what you would pay if you were on a fixed term mortgage. The result? Even more interest savings!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

New Mortgage Rules take Effect Today

Hi Everyone! The new federal mortgage rules implemented two months ago starts today. Heres a quick run down of the key points…

Qualifying Rate
All borrowers must meet the standards for a five-year, fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term. What does that mean from TD’s standpoint? Home Equity Lines of Credits, Fixed Rate Mortgages of terms less than 5 years and all Variable Interest Rate Mortgages will be adjudicated based on the greater of the 5 Year Bank of Canada Benchmark Rate, or the actual customer rate (inclusive of customer discretion). So if you qualified for a $250,000 variable rate mortgage with a qualifying rate of 3.84% and today the qualifying rate has changed to 5.85%, this means that your income needs to be roughly 25% higher today than it was before. The 5 year Bank of Canada Benchmark rate is defined at the chartered bank – conventional mortgage 5 year mortgage rate, published by the Bank of Canada each Monday. To find the 5 year bank of Canada benchmark rate, click here.

Refinances
The maximum Canadians can withdraw when refinancing their mortgages drops to 90 per cent of the value of their home, from 95 per cent. Second homes now qualify for high-ratio insured financing if they have no more than one unit.

Rental Properties
Buyers must make now a minimum 20 per cent down payment, up from five percent, to qualify for CMHC insurance for non-owner occupied properties purchased as an investment.

Key Interest rates (April 19, 2010)
Qualifying rate = 5.85%
TD Prime = 2.25%
Next BOC meeting = April 20, 2010

No matter what type of mortgage financing you are looking for, it makes sense to speak to me first. I am available outside of normal banking hours, weekends and evenings to suit your schedule. Thank you!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

Understanding Fixed Mortgage Rates

Anyone caught off-guard by mortgage rate hikes by five of Canada’s banks during the last week of March probably wasn’t paying attention to the bond market. Let’s face it, that means most people.  A common misperception is that mortgage rates follow the Bank of Canada’s overnight lending rate. Even though we’ve seen historical lows in both over the last few months, the central bank only affects variable mortgage rates. Fixed-rate mortgages are affected by government bond yields, which have been trending upward for the past six weeks. Whats the reason for this? Bond traders are expecting the Bank of Canada to either raise rates sooner than the planned date of July 20 or be more aggressive in raising them than previously anticipated. Typically, the bond market moves two to four months before the Bank of Canada does.

Banks like the difference between the five-year bond yield and their best – not the posted – five-year mortgage rate to be between 90 and 110, although others suggest the spread is 125 to above 135. That spread is the profit between what banks can secure money at and what they can sell it at in the form of mortgages. It’s not necessary to understand the intricacies of how bond markets work to figure out where mortgage rates are heading, just pay attention to patterns in yield changes, which are readily available online, such as here. When the spread between bond and mortgage rates goes too high, banks bring their rates down, and when the spread dips, they increase them.

First-time homebuyers looking for security should take a fixed five-year mortgage, but consumers comfortable with a variable mortgage can find rates at less than 2%. No matter what type of mortgage financing you are looking for, it makes sense to speak to me first.

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

Original Article from Financial Post

Fixed or Variable

With the recent rise in interest rates, people deciding between a fixed and variable mortgage are often asking the question “Where do you see rates going?”.  The reality is that nobody knows. Aside from showing you where we are in the rate cycle, how rates have performed after past recessions, and other available research, the best thing a borrower can do is to measure their ability to handle rising payments. I came upon an article that uses a handy acroynm called IDEAS to help borrowers evaluate their situation. IDEAS stands for Income, Debt, Equity, Assets, Satisfaction with Risk.

• Income – Is the borrower’s income stable and reliable?
• Debt – Does the client have a reasonable debt ratio?
• Equity – Does the client have enough equity?
• Assets – Does the client have enough Assets?
• Satisfaction with Risk – Can the client accept risk?

If most of the answers to the above are positive, then a variable mortgage is something a homeowner can entertain. After evaluating someone against IDEAS, other topics that borrowers may want to discuss are future interest rate scenarios, pros and cons of rate conversion and cost comparison of variable versus fixed terms based on future rate assumptions. For most people, the decision between fixed and variable will either save them thousands or cost them thousands.  The goal is to try and take as much of the gamble out of the equation as possible.

No matter what type of mortgage financing you are looking for, it makes sense to speak to me first.

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

Original Article from Canadian Mortgage Trends

Lower rates?

With talks of interest rates going up  in the near future, TD Canada Trust is lowering its residential mortgage interest rates on the 7 and 10 year terms, effective March 23, 2010. This is great news, especially for borrowers who are looking for the additional security of fixed interest rates and longer terms. For those of you that like to stick to a budget, wouldnt it be nice knowing that your interest rate and payments won’t change over the next 7 or 10 years? This is one option to consider , but with the right advice, TD has many products that can save you money and offer you peace of mind. Our special fixed rates are as follows:

7-year closed                4.65%                 
10-year closed              4.99%                  

Rates calculated semi-annually, not in advance. Special rates are at a discount to TD Canada Trust’s posted rates. Call me today to book a rate.

Sincerely,
Josephine ng
www.tdmortgage.wordpress.com

Original Article from TD Media Room

Are Low Mortgage Rates Here To Stay?

At some point every year, I have a lively conversation about interest rates with my uncle that always ends with a familiar line that goes something like, ” …but have you forgot when interest rates were 20%? It could happen again.”

Good drama, that is, as he always makes it sound like those were long, tough days, etched in his memory forever, and that we all suffered long-term psychological affects as a result of those interest rates.

The truth of the matter is that if you look back over the years, those incredibly high interest rates lasted only a few months before rapidly decreasing. Inflation was the culprit then, hovering in the 12% range for most of the early 1980s, a far cry from today’s core rate of 1.5%. However, while interest rates were that high for only short period, many people panicked and locked in to long-term mortgages, only to see interest rates fall in the following year – dramatically.

Let’s take a moment to better understand how inflation can affect interest rates in Canada. First off, the term ‘core inflation rate’ is likely one of the most misunderstood economic terms that is used by governments around the world. The core rate measures the price change in products and services that we purchase in our lives and excludes many items which have volatile price movements (energy and food products). Many of these volatile products are items a normal family buys each month.

Governments control our spending behavior by manipulating interest rates. When inflation is low, we can maintain low interest rates, which encourage consumers to spend which, in turn, should stimulate the overall economy.

Inflation affects
I suggest to people that they measure their own inflation rate based on the products and services they buy. For example, buying a home in Toronto became more expensive in 2008 due to mayor David Miller’s new municipal land transfer tax, but this new levy does not apply to someone living outside of this city. Likewise, when the Liberals in Ontario pass the new harmonized sales tax (which sounds peaceful and serene) it adds an additional tax of 8% to all new homes over $400,000 in the province. This increase in price affects residents in Ontario only. The point is: where we live and how we live always dictates our personal inflation rate.

Over the past decade, we have witnessed large movements in interest rates and we have learned not to panic and make quick, short-term decisions. From 1990 to 2004, interest rates decreased to a low of 3.5% from a high of 12%. Since 2004, rates moved higher to 6.25%, only to fall again the following year. The long-term trend would suggest that Canada has wrestled inflation to the ground, which brought affordability to the market for the past eight years and has fueled tremendous growth in real estate values. We now are painfully aware that there were many other interesting factors at work that artificially fueled almost every aspect of our economy. But interest rates have actually decreased. When you really think about it, we have got ourselves into so much hot water that we cannot increase rates in fear of stopping what little economy we have going.

Our advice in this market is to stay calm and move away from sharp objects. Is now the time to lock into a long-term mortgage contract? Does a 4% five-year rate look pretty tantalizing? Well, how does 3% sound? As long as our largest trading partner, the US, is having problems, rates will remain low to stimulate our economies. Let’s be clear: every economist and business leader in the world anticipates that once the government stimulus begins to work its way through the system, interest rates will begin to rise to combat price pressure. But until then, now is a great time to enjoy the low rates and pay down your mortgage.

The good news for Canadians is that the prime rate in Canada will likely decrease again in the following months. Whether it moves to 0% like it has in the US, only time will tell. But this makes mortgages extraordinarily inexpensive in this country. Many mortgage brokers have long educated clients on the benefits of choosing a variable rate mortgage over a fixed product. The fact is that the prime rate in Canada has maintained a 3% band for the past nine years. We recognize that there is a comfort in knowing what your mortgage payment is each month, and variable rate mortgages are often associated with volatility.

Buyers should seek advice from qualified mortgage agents who represent the entire marketplace and have access to many different products and solutions. At the end of the day, the best lesson is that it is easier and less expensive to pay off your mortgage when rates are low. Now is your opportunity to start contributing to your bottom line and not your bank’s.

Don Bayer is president of MonsterMortgage.ca in Toronto, Ont.

From the June 2009 issue of Canadian Real Estate

Mortgage Renegotiation Inquiries on the Rise

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