Posted by: Don Bayer, CFP
The hoopla surrounding today’s historically low mortgage rates in Canada started in January of 2012 when The Bank of Montreal – yes, BMO, started a new show – “Mortgage Rate Wars” which angered a few people including the Bank of Canada Governor, Mark Carney; Minister of Finance, Hon. Jim Flaherty and likely all the bosses at competing banks.
I say “competing banks” tongue-in-cheek because the Canadian banking system is set up to give consumers very little real choice.
The Bank of Canada Governor, Mark Carney, was approached by TD Bank requesting changes to the qualification rules on mortgages as far back as October of 2011. The TD Bank boss led this charge as he didn’t want to be the only bank to restrict borrowing criteria. Typically, in a free market society, the government and the governor of the Bank of Canada step back and let the market dictate pricing. It appeared to have paid off as interest rates then started to creep up in March 2012 – which naturally reduced demand for mortgages in Canada and therefore slowed down the market at the time.
It is very interesting that Minister Flaherty stated that if banks are so concerned with inflated real estate and the proverbial “bubble” discussion than they should change the way they lend money – don’t make it so easy – after all its your bank’s capital that you are lending and nothing is preventing you from making it harder to qualify for a mortgage. Of course, on July 9th, 2012, the government did step in and implemented the “new” mortgage rules that we see today – an attempt to tighten and cool the heated Canadian real estate market as the big banks could not be trusted to do it themselves.
Canadian banks earn on average 70% of their $25 billion dollars in profit each year off the backs of retail Canadians. In a bank’s financial statements, banks do not break-down earnings from mortgage operations independently as this would lead to a revolt in Canada. After seeing the amount of profits banks earn off of the mortgages of Canadians, the sales of pitchforks would increase exponentially. Detailed financial statements would require the big banks to breakdown their fee structure and really cause a stink in the media (You may have noticed a new monthly fee in 2012 from your bank – $1.00 per month for electronic record keeping).
Make of it what you will, but when it comes to international borders, Canadian banks have not been very successful at redeploying their capital. It might be that the kinds of tactics employed in Canada by Canadian banks against Canadians just won’t fly in other nations.
Now isn’t the time to panic as Canada’s largest trading partner continues to reiterated their view that interest rates will stay low in the United States for the foreseeable future. Low interest rates in the United States will keep pressure on Canada to keep our interest rates low, likely in the 3-4% band for five year fixed rate mortgages through to 2012. Don’t forget that we are in a global credit crisis which is nowhere near its end and we have had three ‘false starts’ since the first credit crisis in 2008. ‘False starts’ refer to scenarios where interest rates start to gradually increase, leading people to believe that a permanent rise in interest rates is coming, only to get pulled back as a result of U.S. and European debt concerns. None of this has changed as many of the same concerns that existed throughout 2012 still exist today.
There are a few things consumers should be aware of in the Toronto marketplace. Certainly ‘high priced, high rise condos’ still remain very tricky to finance. This is especially true for Hotel Condominiums as there a few coming on stream very shortly. If you have a home in the $400,000 to $1,000,000 range, this market is moving well. It is important to speak with a mortgage broker prior to your move as qualifying has changed significantly since your last approval and new mortgage rules have been put in place after 2008. These mortgage rules limit everything from qualifying rates to amortizations. It’s always a good idea to get some straight, simple advice from your local Toronto mortgage broker before making a financial commitment…remember if you’re dealing with a commendable professional mortgage broker, this advice is always FREE!
Last but certainly not least – appraisal companies are getting very conservative in their valuations. MonsterMortgage.ca and many Toronto mortgage brokers have had numerous appraisals come in under purchase price in the past four months. Banks are not supporting the highest value on the street, so make sure your real estate agent has shown you comparable sales before you buy. If you set the price benchmark in your area, you will be disappointed financially. As always, Toronto’s premier mortgage broker, MonsterMortgage.ca, is here to field calls before, during and after your purchase, or on the refinance or renewal of your current mortgage. In addition, if you are purchasing a unique piece of property – say a tear down that is solely land value, a higher end condominium or any type of acreage – well, septic country type living – put a financing condition in the offer so you can have the valuation determined before you make the contract valid. It’s just good common sense and as the Canadian real estate market goes into equilibrium, it will once again be commonplace to take a few days to consider your home purchase.