Whatever you might need some extra cash for right now, there are many lending options available. And while being able to shop around is a good thing, it can also be overwhelming.

One of the key things to look for in any loan is a favourable interest rate – usually expressed as a percentage of the principal amount. Generally speaking, payday loans and credit cards have the highest interest rates, while conventional mortgages have the lowest, with other options falling somewhere in the middle. Let’s look into the interest rates offered by three popular types of loans, as well as what else you should be considering when comparing your options.

HOW ABOUT HELOCS?
Aside from a conventional mortgage, a Home Equity Line of Credit (HELOC) has one of the lowest interest rates of all lending options, typically between 3.5 and 5.5%. A HELOC is a revolving line of credit which allows you to release equity from your home by borrowing up to 65% of the property’s value.

HELOCs are a popular choice due to their low interest rate and the fact that they allow you to access your home’s equity while continuing to live there. They’re also a good choice if you want the flexibility to take out money when you need it, rather than receiving it as a lump sum or on a monthly basis.

Unfortunately, however, banks have recently become stricter about who they approve for a HELOC. To get one, you have to prove you have sufficient monthly income, a low credit score, and a favourable debt-to-income ratio – something which has led to many Canadians seeing their applications denied.

LET’S GET PERSONAL
Another popular lending option is a personal loan. These are loans which aren’t secured against an asset such as your home.

Advantages of taking out a personal loan include their versatility – unlike a mortgage or a car loan, they can be used for whatever you want, like consolidating existing debt. What’s more, the application process is usually quicker than other lending options; in some cases you’ll get the money in your bank account within a few days. Another advantage is that the interest rate is also usually – though not always! – fixed.

On the flip side, however, their interest rates are often higher than other options such as a HELOC – around 8.5-12%. On top of this, they can be hard to qualify for and have rigid repayment terms, meaning monthly payments must be made.

THE REVERSE MORTGAGE SOLUTION
Another lending option which is tailor-made for Canadians 55+ is the reverse mortgage. A reverse mortgage allows you to access up to 55% of your home’s equity without selling, and while interest rates are slightly higher than that of the HELOC – at 5-7% – they are significantly lower than other loans and offer many other benefits that make them a strong option.

These benefits include the fact that they’re easier to qualify for, as you don’t have to prove a monthly income. You also don’t have to pay back what you owe until you leave the house, taking away the stress of having to make monthly mortgage payments. Plus, the CHIP Reverse Mortgage’s No Negative Equity Guarantee means you’ll never end up owing more than the house is worth, leaving you free of financial stress to live the retirement you’ve always planned.

When looking for the best lending option, comparing interest rates is a great place to start, however they’re not the whole story. Taking an in-depth look into the pros and cons of each option will help you choose the one that’s right for you.

Written by

Augostino Tuzi

HomeEquity Bank

Better-Than-Expected Canadian Jobs Report in July Shows Economy’s Resilience

The July Labour Force Survey, released this morning by Statistics Canada, reflects labour market conditions as of the week of July 12 to 18. Although public health restrictions had been substantially eased in most parts of the country—with the exception of some regions of Ontario, including Toronto—some measures remained in place, including physical distancing requirements and restrictions on large gatherings.

From February to April, 5.5 million Canadian workers–30% of the workforce–were affected by the COVID-19 economic shutdown. This included a drop in employment of 3.0 million and a COVID-related increase in absences from work of 2.5 million. Today’s jobs report showed that total employment rose by 418,500 (+2.4%). This is on the heels of a 953,000 (5.8%) gain in June and 290,000 in May. Altogether, this brought employment to within 1.3 million (-7.0%) of its pre-COVID February level.

The number of Canadians who were employed but worked less than half their usual hours for reasons likely virus-related dropped by 412,000 (-18.8%) in July. Combined with declines recorded in May and June, this left COVID-related absences from work at just under 1 million (+972,000; +120.3%) above February levels.

By the week of July 12 to July 18, the total number of affected workers stood at 2.3 million, a reduction since April of 58.0%.

MOST EMPLOYMENT GAINS IN JULY WERE IN PART-TIME WORK

Most of the employment gains in July were in part-time work, which increased by 345,000 (+11.3%), compared with a much smaller increase of 73,000 (+0.5%) in full-time work.

The COVID-19 labour market shock was felt particularly hard in part-time work. From February to April, losses in part-time work (-29.6%) were significantly heavier than in full-time employment (-12.5%). This was due to a number of factors, including part-time work being more prevalent in industries that were most affected by the COVID-19 economic shutdown, namely retail trade and accommodation and food services.

Growth in part-time employment has outpaced full-time growth in each of the past three months. With July gains, part-time work is now closer to its pre-COVID level (-5.0%) than full-time employment (-7.5%).

The relatively flat growth in full-time work in recent months is reflected in an increase in the proportion of part-time workers doing so involuntarily. In July 2019, 22.2% of those working less than 30 hours per week would have preferred full-time work. One year later, this proportion had increased 7.6 percentage points to 29.7%, an indication that the COVID-19 economic shutdown and subsequent re-opening has resulted in a reduction, at least temporarily, in the number of hours being offered by employers.

STRONGER EMPLOYMENT GAINS FOR WOMEN IN JULY, BUT MEN CONTINUE TO BE CLOSER TO PRE-SHUTDOWN LEVELS

In July, employment rose faster among women (+3.4% or +275,000) than men (+1.5% or +144,000). Due to heavier employment losses among women in March, however, employment in July was closer to its pre-shutdown level for men than for women.

Employment was little changed in July among both male and female core-aged workers with children under 18.  As in June, employment in July was furthest away from pre-shutdown levels among mothers whose youngest child was aged 6 to 17.

THE NUMBER OF CANADIANS WORKING FROM HOME CONTINUED TO FALL IN JULY

Among those who were employed and not absent from work, the number working from home dropped by 400,000, compared with an increase of 300,000 in the number working at locations other than home. Despite this decline, the number of Canadians who worked from home in July (4.6 million) remained significantly higher than the number who usually do so (1.6 million).

THE PACE OF IMPROVEMENT FROM JULY ON IS LIKELY TO CONTINUE TO SLOW. 

Compared to February, there were still 274,000 fewer people working in goods production jobs in July. There were still 309,000 fewer workers in accommodation and food services, 109,000 fewer in information, culture, and recreation, over that period – and those services jobs will probably be slower to return with households still sticking closer to home. The recovery in the goods-producing side of the economy will be limited at some point by ongoing weakness in the oil & gas sector.

UNEMPLOYMENT RATE CONTINUES TO DROP FROM MAY’S RECORD HIGH

The unemployment rate was 10.9% in July, falling 1.4 percentage points for the second consecutive month and down from a record high of 13.7% in May. The unemployment rate was 5.6% in February.

The number of unemployed people fell for the second consecutive month in July, down 269,000 (-11.0%). Despite this decrease, almost 2.2 million Canadians were unemployed in July, nearly twice as many (+92.6%) as in February (1.1 million).

In July, temporary layoffs declined sharply for a second consecutive month, down 384,000 (-45.5%). Among those on temporary layoff in June, approximately half became employed in July, either returning to their old job or starting a new one (not seasonally adjusted). Despite the sharp declines in June and July, the number of people on temporary layoff (460,000) was more than four times higher than it was in February.

In July, the number of people searching for work increased 115,000 (+7.1%), mainly the result of people entering the labour force to look for work.

Employment Increases in Most Provinces in July–Led by Ontario and Quebec

In Ontario, employment rose by 151,000 (+2.2%) in July, building on an increase of 378,000 in June and bringing jobs to 91.7% of its pre-pandemic February level. The initial easing of COVID-19 restrictions occurred later in Ontario than in most other provinces. Additional easing was introduced in most regions of the province on July 17, at the end of the survey week.

Employment in the census metropolitan area of Toronto increased by 2.2% in July. This was the same rate of increase as the province, despite the loosening of the COVID-19 restrictions occurring later in the provincial capital than in most other regions. Employment in Toronto reached 89.9% of its February level.

Employment in Quebec increased by 98,000 (+2.4%) in July, adding to gains in the previous two months and bringing employment to 94.4% of its pre-COVID level. The increase in employment in July was all in part-time work. The unemployment rate decreased 1.2 percentage points to 9.5%, the third consecutive monthly decrease.

Employment rose more slowly in Montréal  (+28,000; +1.3%) than in the rest of Quebec and reached 94.4% of its February level.

The number of employed British Columbians increased by 70,000 (+3.0%) in July, reaching 93.5% of the February employment level. The unemployment rate fell by 1.9 percentage points to 11.1%.

In Vancouver, employment increased by 48,000 (+3.8%) to reach 89.9% of the February level, a degree of recovery lower than the province as a whole.

In Alberta, employment increased by 67,000 (+3.2%) in July, including gains in both full-time and part-time work. The unemployment rate for the province fell by 2.7 percentage points in July to 12.8%, the first decline since the COVID-19 economic shutdown.

In Saskatchewan, employment rose by 13,000 (+2.5%), while the unemployment rate fell 2.8 percentage points to 8.8%.

Employment in Manitoba increased (+12,000) for the third consecutive month, and the unemployment rate declined by 1.9 percentage points to 8.2%.

Employment in Newfoundland and Labrador increased by 4,300 (+2.1%) in July, and the unemployment rate dropped 0.9 percentage points to 15.6%.

In Nova Scotia, employment rose by 3,400 (+0.8%) in July, reaching 92.7% of its February level. The unemployment rate in the province declined by 2.2 percentage points to 10.8%.

Employment in Prince Edward Island rose by 1,100 in July (+1.5%), adding to the gains in the previous two months. The unemployment rate declined by 3.5 percentage points to 11.7%.

In New Brunswick, employment was little changed in July after recording employment gains of 39,000 from April to June. Employment in the province—which was among the first to begin easing COVID-19 restrictions—was at 96.6% of its pre-COVID February level, the most complete employment recovery of all provinces to date.

BOTTOM LINE 

This was a strong jobs report, but the low-hanging fruit has already been picked. Undoubtedly, Canada’s economy is still digging itself out of a deep hole, and some jobs are gone for good. Accommodation and food services are still hard hit, as is leisure and entertainment.

Many small and some large businesses will not survive. But new sectors are proliferating as the pandemic accelerated the technological forces that were already in train. I expect to see strong job growth in the following new and burgeoning areas: telemedicine, big data, artificial intelligence, cloud services, cybersecurity, 5G, driverless transportation and clean energy. Online shopping will also continue to proliferate as Canadians have learned to use delivery services and online retail.

Unfortunately, those who can afford it least were hardest hit in the pandemic-shutdown. Many of the lost jobs will not return.

Canada has done an excellent job of flattening the pandemic curve, but as evidenced by what is happening in the US, we cannot let our guard down. As many students return to the classroom, the risk of disease spread will undoubtedly rise. Also, we have no idea what colder weather will bring or when a vaccine will be widely available. We must continue to prepare for the worst but hope for the best. In the meantime, our economy is proving its underlying resilience, and our government policies are cushioning the blow to those that are suffering the most.

South of the Border–US COVID Situation Is A Disaster 

Nearly every country has struggled with the pandemic and made mistakes along the way. But the US stands alone among affluent countries in the failure of its pandemic response. In the past month, about 1.9 million Americans have tested positive for the virus. That’s more than five times as many as in all of Europe, Canada, Japan, South Korea and Australia, combined.

“Even though some of these countries saw worrying new outbreaks over the past month, including 50,000 new cases in Spain … the outbreaks still pale in comparison to those in the United States. Florida, with a population less than half of Spain, has reported nearly 300,000 cases in the same period,” wrote David Leonhardt of the New York Times yesterday.

Moreover, the end of July saw the expiration of the $600/week federal top-up of unemployment benefits, which to-date has been successful at providing a floor for household income, and subsequently helps boost household spending. As well, the prohibition of eviction has ended as Congress continues to wrangle on a new relief package.

Larry Kudlow, the administration’s chief economist, declared last week that a “V-shaped recovery” was still on track. There is no way that will be possible given the suspension or reduction in federal assistance, the rapidly depleting funds of the state and local governments who are, by law, not allowed to run budget deficits, and the continued surge in the disease.

Today’s July jobs report in the US showed the economic rebound was still making headway as payrolls increased by 1.76 million in July, beating economists estimates. The unemployment rate fell to 10.2%, while a broader gauge of joblessness also declined to 16.5%.

The path forward for the US will remain quite difficult as businesses use up the last of their federal loans and reduced unemployment benefits pressure consumer spending. The rebound in the US economy is fragile, as high-frequency data continue to indicate. For the week of July 31st, new COVID cases continue to worsen. Some states have had to halt or even backpedal reopening plans; same-store sales are falling, as are restaurant bookings, electricity demand, airline tickets and public transit ridership.

At the time of this writing, the latest headlines are screaming that “US Virus Aid Talks Are On the Brink of Collapse,” as Trump mulls over an executive order on some jobless aid. American consumer confidence can’t help but be badly battered by such incompetence, as the world looks on in utter disbelief.

Written by

Dr Sherry Cooper

Chief Economist, Dominion Lending Centres

More Green Shoots–Employment Rebounds 10.6% in May 

The doomsayers have been proven wrong by this employment report and by the high-frequency data that have been pointing to the start of a rebound in Canada’s economic activity. We have been signalling green shoots in the economy for several weeks, and while these are early days, those green shoots are surely growing. We are optimistic but mindful that just under 5 million Canadians remain without work or with substantially reduced hours.

Job Market Has Improved From Mid-April to Mid-May

Canada’s  Labour Force Survey (LFS) results for May, released this morning by StatsCanada, reflect jobs market conditions as of the week of May 10 to May 16. By then, some provinces had begun to gradually ease the pandemic lockdown that has thrown our economy into recession. Already, as of mid-May, the jobs market had shown a marked improvement, and no doubt, it has subsequently continued to revive.

From February to April, 5.5 million Canadian workers were affected by the pandemic shutdown. This included a drop in employment of 3.0 million and a COVID-related rise in absences from work of 2.5 million. Economists were expecting another 500,000 job losses last month. They were wrong.

In May, employment rose by 289,600 (1.8%), while the number of people who worked less than half their usual hours dropped by 292,00 (-8.6%). Combined, these changes represented a recovery of 10.6% of the pandemic-related employment losses and absences recorded in the previous two months. Three-quarters of the employment gains from April to May were in full-time work. The growth was across most industries and provinces, though largely driven by higher employment in Quebec, the province hardest hit by the pandemic. 

Compared to February–prior to the lockdown–however, full-time employment was down 11.1% in May, while part-time work was down 27.6%.

QUEBEC ACCOUNTS FOR NEARLY 80% OF OVERALL EMPLOYMENT GAINS IN MAY

The Quebec provincial government eased restrictions on business activity before the jobs report reference week of May 10 to May 16, notably in construction from mid-April, and in retail trade and manufacturing outside Montréal from May 4. The proportion of workers labourers from a location other than home increased from 60% in April to 65% in May.

The largest employment increases in Quebec were in construction (+58,000), manufacturing (+56,000) and wholesale and retail trade (+54,000), three industries with a relatively high proportion of jobs that are difficult to do from home.

Employment increased by 97,000 (+5.3%) within the Montréal census metropolitan area.

Employment Declines Continued in Ontario But At A Slower Pace

Ontario was the only province where employment continued to fall in May. This is consistent with the fact that most restrictions on economic activity remained in place in Ontario during the week of May 10 to May 16.

While employment declined in Ontario in May (-65,000), it did so at a much slower pace than in March (-403,000) and April (-689,000). All of the employment decline in the province in May was in the services-producing sector (-80,000). At the same time, employment rose by 15,000 in the goods-producing sector, driven by manufacturing (+14,000).

The proportion of employed people in Ontario who worked less than half their usual hours dropped from 22.1% in April to 21.2% in May.

In Ontario, 55% of workers worked from a location other than home in May, the lowest proportion of all provinces and little changed from April.

As most restrictions on economic activity remained in place in Ontario, the number of people who were not in the labour force but wanted to work and did not look for a job was little changed. The unemployment rate continued its upward trend, rising from 11.3% in April to 13.6% in May (see the table below).

Employment Picture Mixed In Western Provinces

Employment in British Columbia increased by 43,000 in May and the unemployment rate rose 1.9 percentage points to 13.4%, as more people looked for work. Almost all of the employment increase in the province was in the services-producing sector (+41,000), led by accommodation and food services (+12,000), educational services (+12,000), and wholesale and retail trade (+12,000).

British Columbia announced a first phase of reopening on May 6, with a plan to lift restrictions on non-essential medical services and parts of the retail trade industry starting May 19, after the reference week.

The number of employed people in Alberta grew by 28,000 in May, following a cumulative decline of 361,000 from February to April. The employment increase in the province was entirely driven by the services-producing sector (+33,000). The unemployment rate increased by 2.1 percentage points to 15.5%.

Alberta allowed some businesses such as restaurants and non-essential shops to start operating from May 14.

In Manitoba, employment increased by 13,000 in May. At the same time, the proportion of employed Manitobans who worked less than half their usual hours fell by 1.7 percentage points to 12.9%. In May, most of the employment increase in Manitoba was in the services-producing sector (+12,000), the majority of which was in wholesale and retail trade (+7,000).

On May 4, Manitoba allowed a number of services businesses to resume their activities, with limited occupancy and physical distancing requirements.

There was little change in overall employment in Saskatchewan. Increases in wholesale and retail trade, manufacturing and accommodation and food services were offset by declines in many sectors, led by information, culture and recreation as well as in construction.

EMPLOYMENT INCREASES IN ALL ATLANTIC PROVINCES

With the exception of Nova Scotia, provincial governments in the Atlantic provinces started to ease restrictions in early May, with New Brunswick reopening most of its economy from May 8. The number of employed people increased in New Brunswick (+17,000), Newfoundland and Labrador (+10,000), Nova Scotia (+8,600) and Prince Edward Island (+2,600).

Green Shoots

There is increasing evidence that the economy has bottomed and is gradually improving. Business shutdowns are easing, and while it will be some time before we see a complete reopening, early signs of improvement are evident.

A Bloomberg News poll taken at the end of May found that 30% of respondents who had lost their job or seen hours decline because of the coronavirus pandemic said they were re-employed or working more. The survey, conducted by Nanos Research, is consistent with other high-frequency data from Indeed Canada and Google that suggest stabilization in labour conditions and economic activity over the past few weeks.

The rebound story is also reinforced by Canadians’ movement patterns. Mobility data from Apple and Google smartphones during the latter half of May suggest more people present in retail stores and parks — coinciding with re-openings across Canada. While transit usage remains down, driving and walking have picked up, a positive sign for commerce.

In addition, the Office of the Superintendent of Bankruptcy Canada reported that the total number of insolvencies (bankruptcies and proposals) decreased by 38.7% in April compared to the previous month. Bankruptcies decreased by 41.5% and proposals decreased by 37.2%. The total number of insolvencies in April 2020 was 43.5% lower than the total number of insolvencies in April 2019. Consumer insolvencies decreased by 43.1%, while business insolvencies decreased by 54.8%.

On another positive note, commodity prices have rebounded. Most notably for Canada, oil prices have risen sharply–great news for Alberta and Saskatchewan. As well, the Canadian stock market has rebounded significantly and the Canadian dollar is up. The Bank of Canada noted this week that the worst of the pandemic decline is behind us.

The Royal Bank economists survey of consumer spending in May shows continued recovery as discretionary spending is returning.

• “As Canadian provinces take steps to reopen their economies, consumers have begun spending more on the discretionary items they shunned during the early phase of the pandemic.
• Entertainment and art spending has benefited most from easing restrictions.
• Spending on dining out continues to recover from lows, as restaurants adapt to take-out and other delivery models.
• Formerly slow spending at merchants selling apparel, gifts & jewelry picked up steam in early May; Canadians spent more at clothing stores in particular.
• Spending at merchants selling household goods remains strong, reflecting spending at DIY construction stores, and on appliances and furniture.
• Canadians began to drive more through early May, and card spending on auto expenses continued to pick up.
• In mid-May, spending at entertainment and art merchants was down 37% from a year earlier, compared with a 58% drop in late April.
• Golfers dusted off their putters as golf courses opened up around the country. Those who prefer playing inside continued to spend on online and console gaming.”

Concerning the housing market, before the pandemic, we were going into the spring season with the prospect of record sales activity in much of the country. Aside from oil country–Alberta and Saskatchewan–all indications were for a red-hot housing market. So the underlying fundamentals for housing remain positive as the economy recovers. How long that will take depends on the course of the virus and whether we see a second wave in the fall.

Real estate boards report a pick-up in home sales in May in the GTA and GVA.

Interest rates have plummeted. Thanks to the 150 basis point decline in the prime rate, variable rate mortgage rates have fallen for the first time since late 2018. Once the Bank of Canada was able to establish enough liquidity in financial markets, even fixed-rate mortgage rates have fallen.

The posted mortgage rate finally fell to 4.94% last week, but it remains well above contract rates; but with any luck at all, this qualifying rate for mortgage stress tests will ease in coming months and the regulators will change the qualifying rate to a contract rate plus 200 basis points, as planned to happen in April before the pandemic hit.

The Bank of Canada will remain extremely accommodating. In my view, interest rates will not rise until 2022.

One piece of bad news for housing was yesterday’s CMHC announcement of a tightening in mortgage qualification rules for mortgage borrowers with less than a 20% down payment. As I wrote yesterday, I believe this action flies in the face of measures taken by the Bank of Canada, OSFI, and the Department of Finance to cushion the blow of the pandemic and prevent unnecessary insolvencies. CMHC’s tightening measures reduce housing affordability, especially for first-time home buyers, by more than 10% and are totally unwarranted from a prudential perspective. For more on that, see yesterday’s report. As well, Bloomberg News also suggested the same in their article, Canadian Housing Agency Draws Fire For Tightening Mortgage Rules.

Written by Dr. Sherry Cooper

CMHC Makes It Harder To Qualify For An Insured Mortgage

Once again, the Canadian Mortgage and Housing Corporation (CMHC) is tightening the criteria to get a mortgage with less than a 20% down payment. Any potential home buyer with less than a 20% down payment must purchase default insurance on their loan and have a minimum down payment of 5%. CMHC is a federal Crown Corporation that provides such default insurance. Its mandate is to help Canadians access affordable housing options. Providing mortgage insurance to home buyers is one of its main activities. Mortgage default insurance protects lenders in the event a borrower ever stopped making payments and defaulted on their mortgage loan–a very infrequent occurrence in Canada.

There are private providers of default insurance as well–Genworth Financial Canada and Canada Guaranty. CMHC is the only insurer of mortgages for multi-unit residential properties, including large rental buildings, student housing and nursing and retirement homes. It is the largest provider of mortgage default insurance by far and is also the primary insurer for housing in small and rural communities.

Investment properties are not eligible for mortgage insurance. Because of this, the buyer needs at least a 20% down payment to buy an investment property. Homes costing more than $1 million, as well, are not eligible for mortgage insurance. Typically, the lender chooses the mortgage insurer.

Why is CMHC Tightening Qualifications?

The economics team at CMHC has predicted that owing to the pandemic lock down, home prices will likely fall by 9% to 18% over the next 12 months. They also believe that it will take at least two years for prices to return to pre-pandemic levels. The CMHC forecast for the economy is more pessimistic than many other forecasts, particularly that of the Bank of Canada, which asserted yesterday that the outlook for the economy was better than their April forecast suggested. Moreover, CMHC acknowledges the high degree of uncertainty associated with any forecast at this time. The Crown Corporation highlights the post-shutdown job losses, business closures and the drop in immigration that adversely affect Canadian housing.

They also have emphasized the 15% of existing mortgages that are now in deferral and believe there is a risk that 20% of all mortgages could be in arrears when deferrals end. Their stated justification for tightening qualification requirements is “to protect future home buyers and reduce risk“.

What Are These Changes In Underwriting Policies

Effective July 1, the following changes will apply for new applications for homeowner transactional and portfolio mortgage insurance:

• The maximum gross debt service (GDS) ratio drops from 39 to 35
• The maximum total debt service (TDS) ratio drops from 44 to 42
• The minimum credit score rises from 600 to 680 for at least one borrower
• Non-traditional sources of down payment that increase indebtedness will no longer be treated as equity for insurance purposes

CMHC goes on to say that “to further manage the risk to our insurance business, and ultimately taxpayers, during this uncertain time, we have also suspended refinancing for multi-unit mortgage insurance except when the funds are used for repairs or reinvestment in housing. Consultations have begun on the repositioning of our multi-unit mortgage insurance products.”

Here’s What We Know So Far

Anecdotal reports suggest that it is likely that private default insurers will not match CMHC’s lower debt ratios. They might, however, be more selective in their approval processes.

Canadian fiscal and monetary authorities are expending huge sums to keep the economy afloat, cushion the blow of the shutdown, and to make sure ample credit is available. These actions are intended to minimize unnecessary insolvencies. It is, therefore, surprising that a federal Crown Corporation would take these pro-cyclical actions now.

The exact impact of these changes will not be known until more details are available: How the Big Banks will respond with their own prime mortgage underwriting rules; how these new rules will apply to the securitization market; and how far the private default insurers will go along with these new rules.

Suffice it to say that this batters buyer and seller confidence and, all other things equal, has a net negative impact on the near-term housing outlook.  Most importantly, in my view, these changes are unnecessary to protect the prudence of Canada’s home lending practices. Mortgage delinquency rates are meager, and even the Bank of Canada’s forecast is for delinquencies to remain less than 1% of all outstanding mortgages. Moreover, home buyers with jobs who meet former qualifications would undoubtedly have a longer than two-year time horizon when buying their first homes. They were already qualifying at the posted rate that is more than 250 basis points above the contract rate. If anything, the pandemic recession assures that interest rates will remain very low over the next two years.

Written by Dr. Sherry Cooper

Why Are Mortgage Rates Rising?

Over the past month, the Bank of Canada has lowered its overnight rate by a whopping 1.5 percentage points to a mere 0.25%. Many people expected mortgage rates to fall equivalently. The banks have reduced prime rates by the full 150 basis points (bps). But, since the second Bank of Canada rate cut on March 13, banks and other lenders have hiked mortgage rates for fixed- and variable-rate loans. That’s not what happens typically when the Bank cuts its overnight rate. But these are extraordinary times.

The Covid-19 pandemic has disrupted everything, shutting down the entire global economy and damaging business and consumer confidence. No one knows when it will end. This degree of uncertainty and the risk to our health is profoundly unnerving.

Most businesses have ground to a halt, so unemployment has surged. Hourly workers and many of the self-employed have found themselves with no income for an indeterminate period. All but essential workers are staying at home, including vast numbers of students and pre-school children. Nothing like this has happened in the past century. The societal and emotional toll is enormous, and governments at all levels are introducing income support programs for individuals and businesses, but so far, no cheques are in the mail.

In consequence, the economy hasn’t just slowed; it has frozen in place and is rapidly contracting. Travel has stopped. Trade and transport have stopped. Manufacturing and commerce have stopped. And this is happening all over the world.

What’s more, the Saudis and Russians took advantage of the disruption to escalate oil production and drive down prices in a thinly veiled attempt to drive marginal producers in the US and Canada out of business. This has compounded the negative impact on our economy and dramatically intensified the plunge in our stock market.

Many Canadians are now forced to live off their savings or go into debt until employment insurance and other government assistance kicks in, and even when it does, it will not cover 100% of the income loss. The majority of the population has very little savings, so people are resort to drawing on their home equity lines of credit (HELOCs), other credit lines or adding to credit card debt. Businesses are doing the same.

The good news is that people and businesses that already have loans tied to the prime rate are enjoying a significant reduction in their monthly payments. All of the major banks have reduced their prime rates from 3.95% to 2.45%. So people or businesses with floating-rate loans, be they mortgages or HELOCs or commercial lines of credit, have seen their monthly borrowing costs fall by 1.5 percentage points. That helps to reduce the burden of dipping into this source of funds to replace income.

So Why Are Mortgage Rates For New Loans Rising?

These disruptive forces of Covid-19 have markedly reduced the earnings of banks and other lenders and dramatically increased their risk. That is why the stock prices of banks and other publically-traded lenders have fallen very sharply, causing their dividend yields to rise to levels well above government bond yields. As an example, Royal Bank’s stock price has fallen 22% year-to-date (ytd), increasing its annual dividend yield to 5.31%. For CIBC, it has been even worse. Its stock price has fallen 30%, driving its dividend yield to 7.66%. To put this into perspective, the 10-year Government of Canada bond yield is only 0.64%. The gap is a reflection of the investor perception of the risk confronting Canadian banks.

Thus, the cost of funds for banks and other lenders has risen sharply despite the cut in the Bank of Canada’s overnight rate. The cheapest source of funding is short-term deposits–especially savings and chequing accounts. Still, unemployed consumers and shut-down businesses are withdrawing these deposits to pay the rent and put food on the table.

Longer-term deposits called GICs, which stands for Guaranteed Investment Certificates, are a more expensive source of funds. Still, owing to their hefty penalties for early withdrawal, they become a more reliable funding source at a time like this. As noted by Rob Carrick, consumer finance reporter for the Globe and Mail, “GIC rates should be in the toilet right now because that’s what rates broadly do in times of economic stress. But GIC rates follow a similar path to mortgage rates, which have risen lately as lenders price rising default risk into borrowing costs.”

To attract funds, some of the smaller banks have increased their savings and GIC rates. For example, EQ Bank is paying 2.45% on its High-Interest Savings Account and 2.55% on its 5-year GIC. Other small banks are also hiking GIC rates, raising their cost of funds. Rob McLister noted that “The likes of Home Capital, Equitable Bank and Canadian Western Bank have lifted their 1-year GIC rates over 65 bps in the last few weeks, according to data from noted housing analyst Ben Rabidoux.”

The banks are having to set aside funds to cover rising loan loss reserves, which exacerbates their earnings decline. An unusually large component of Canadian bank loan losses is coming from the oil sector. Still, default risk is rising sharply for almost every business, small and large–think airlines, shipping companies, manufacturers, auto dealers, department stores, etc.

Lenders have also been swamped by thousands of applications to defer mortgage payments.

Hence, confronted with rising costs and falling revenues, the banks are tightening their belts. They slashed their prime rates but eliminated the discounts to prime for new variable-rate mortgage loans. Some lenders will no doubt start charging prime plus a premium for such mortgage loans. Banks have also raised fixed-rate mortgage rates as these myriad pressures reducing bank earnings are causing investors to insist banks pay more for the funds they need to remain liquid.

An additional concern is that financial markets have become less and less liquid–sellers cannot find buyers at reasonable prices. The ‘bid-ask’ spreads are widening. That’s why the central bank and CMHC are buying mortgage-backed securities in enormous volumes. That is also why the Bank of Canada has started large-scale weekly buying of government securities and commercial paper. These government entities have become the buyer of last resort, providing liquidity to the mortgage and bond markets.

These markets are crucial to the financial stability of Canada. Large-scale purchases of securities are called “quantitative easing” and have never been used before by the Bank of Canada. It was used extensively by the Fed and other central banks during the 2008-10 financial crisis. When business and consumer confidence is so low that nothing the central bank can do will spur investment and spending, they resort to quantitative easing to keep financial markets functioning. In today’s world, businesses and consumers are locked down, and no one knows when it will end. With so much uncertainty, confidence about the future diminishes. The natural tendency is for people to cancel major expenditures and hunker down.

We are living through an unprecedented period. When the health emergency has passed, we will celebrate a return to a new normal. In the meantime, seemingly odd things will continue to happen in financial markets.

Written by Dr. Sherry Cooper

For most people, your personal credit score and how a credit score is calculated are complete mysteries. How can you be expected to play and be successful if you aren’t even told the rules of the game? There are things borrowers can do to improve their score so they can access better mortgage products and save thousands of dollars, or qualify for their wonderful home when they otherwise might have trouble. Let’s stick handle through just some of the key things you should know about managing your credit score.

Amount owed and utilization accounts for 30% of your score. There are a lot of people that end up with high balances on their credits cards and struggle to meet the payments each month. If they manage to pay off their credit cards without seeing a mortgage broker to consolidate their debts, often the immediate response is to close the accounts. A better response is to cut up the cards and delete the numbers from your computer and devices and keep the accounts open. You want any remaining outstanding balances to be less than 75% of your total combined credit available, and if they are less than 35%, even better, because this keeps your utilization of available credit low and increases your credit score. Types of credit and the number of different credit products accounts for 10% of the score, so this is another reason you want to keep those accounts open. Cell phone providers are now reporting to the agencies that publish credit scores as well.

In some parts of the world where credit products are not well established, a borrower’s credit is evaluated based solely on how they have managed payments on their cell phone bills. It’s important to pay your cell phone bills on time; we’re all busy, so setup automatic payments to ensure a payment is not missed. My last word of advice for today is to monitor your credit score by purchasing your own credit report each year for about $25 so you know your score and to ensure the report is accurate. This will help you stay within the boundaries of the game.

There is a lot more to managing a credit score than I can get into in this short blog. If you would like to know more, contact me or your local Dominion Lending mortgage broker. We can provide advice to help you manage your credit score and put you in a better position to qualify for a mortgage with better rates. Know the rules of the game, plan ahead for your home financing, and play SMART.

Written by :  Todd Skene

If you’re in a mortgage that’s coming up for renewal in the coming months and you’re considering just staying with your current lender, you wouldn’t be alone.
According to the Canadian Mortgage and Housing Corporation’s (CMHC) Residential Mortgage Industry Report released in the summer, in 2018, the number of mortgage renewals with the same lender increased by 16 per cent over the previous year.
The report suggested one of the factors that may have contributed to large increases in loan renewals with the same institution are the tighter approval criteria. In other words, people are worried they may not qualify for a new mortgage if they switch lenders, so they’re staying put.
You’ll remember in the fall of 2017, OSFI, (the Office of Superintendent of Financial Institutions) the agency that regulates the financial industry, announced tighter rules on mortgages. The biggest change related to uninsured mortgages, or homebuyers with 20 per cent or more for a down payment. These people are now required to go through a “stress test” or qualify using a minimum qualifying rate.
The changes came a year after a similar stress test was introduced for insured mortgages.
If the tighter mortgage rules still have you stressed as you face a mortgage renewal, the CMHC report noted the approval rate for same lender renewals remained stable at 99 per cent. Renewals are not specifically subject to the new stress test and are more likely to meet current lender criteria, the reported noted.
So, does that mean you should just automatically renew your mortgage with the same lender when your term is up? Not necessarily. You need to reach out to a mortgage professional to get the best advice.
For starters, most lenders, especially the big banks, will send you a renewal letter when there’s about three months left on the term. Sometimes that letter could come with six months left. Typically, the lender will offer you a rate at that time and all you’ll have to do is sign at the bottom line to roll over your mortgage.
But beware, lenders often offer a higher rate than a new client because they’re hoping the ease of renewal will keep you from seeking out a new lender and lower rate.
In some cases, it may be best to just sign and roll over your mortgage. There are a few things to consider. If you decide to change lenders, you’ll basically have to go through an approval process again. That entails getting all your documents, lawyer’s fees and appraisals.
You’ll have to ask yourself, is it worth the effort to save a few basis points off your rate, or a few hundred dollars over a term to make the switch?
For some it won’t be. But, if a switch can lead to saving thousands of dollars, it would certainly be something to consider. While everyone’s situation is different, the larger the mortgage, the bigger the savings will be if you can find a lower rate.
Often, homeowners will just use a bank their parents recommend for their first mortgage. But they might find themselves not happy with the service or terms of the mortgage and may just want to switch to a different lender as the mortgage comes up for renewal.
If that’s a situation you find yourself in, you have options, and a Dominion Lending Centres mortgage broker can help you make the best decision.

Written by Jeremy Deutsch

Buying a home might just be the biggest purchase of your life—it’s important to do your homework before jumping in! We have outlined the 5 mistakes first time homebuyers commonly make, and how you can avoid them and look like a Home Buying Champ.

1. Shopping Outside Your Budget
It’s always an excellent idea to get pre-approved prior to starting your house hunting. This can give you a clear idea of exactly what your finances are and what you can comfortably afford. Your Mortgage Broker will give you the maximum amount that you can spend on a house but that does not mean that you should spend that full amount. There are additional costs that you need to consider (Property Transfer Tax, Strata Fees, Legal Fees, Moving Costs) and leave room for in your budget. Stretching yourself too thin can lead to you being “House Rich and Cash Poor” something you will want to avoid. Instead, buying a home within your home-buying limit will allow you to be ready for any potential curveballs and to keep your savings on track.

2. Forgetting to Budget for Closing Costs
Most first-time buyers know about the down payment but fail to realize that there are a number of costs associated with closing on a home. These can be substantial and should not be overlooked. They include:
• Legal and Notary Fees
• Property Transfer Tax (though, as a First Time Home Buyer, you might be exempt from this cost).
• Home Inspection fees
There can also be other costs included depending on the type of mortgage and lender you work with (ex. Insurance premiums, broker/lender fees). Check with your broker and get an estimate of what the cost will be once you have your pre-approval completed.

3. Buying a Home on Looks Alone
It can be easy to fall in love with a home the minute you walk into it. Updated kitchen + bathrooms, beautifully redone flooring, new appliances…what’s not to like? But before putting in an offer on the home, be sure to look past the cosmetic upgrades. Ask questions such as:
• When was the roof last done?
• How old is the furnace?
• How old is the water heater?
• How old is the house itself? And what upgrades have been done to electrical, plumbing, etc.
• When were the windows last updated?

All of these things are necessary pieces to a home and are quite expensive to finance, especially as a first- time buyer. Look for a home that has solid, good bones. Cosmetic upgrades can be made later and are far less of a headache than these bigger upgrades.

4. Skipping the Home Inspection
In a red-hot housing market, a new trend is for homebuyers to skip the home inspection. This is one thing we recommend you do not skip! A home inspection can turn up so many unforeseen problems such as water damage, foundation cracks and other potential problems that would be expensive to have to repair down the road. The inspection report will provide you a handy checklist of all the things you should do to make sure your home is in great shape.

5. Not Using a Broker
We compare prices for everything: Cars, TV’s, Clothing…even groceries. So, it makes sense to shop around for your mortgage too! If you are relying solely on your bank to provide you with the best rate, you may be missing out on great opportunities that a mortgage broker can offer you. They can work with you to and multiple lenders to find the sharpest rate and the best product for your lifestyle.

Remember, when you are buying a home, you are not alone! The minute you decide to work with a Dominion Lending Centres Mortgage Broker you are bringing on a team of individuals who are there to help you through the process from start to finish.

Written by Geoff Lee

The new First Time Home Buyer Incentive program from CMHC (Canadian Mortgage and Housing Corporation) was officially released on September 2. This program was met with mixed reactions across the mortgage industry, but we wanted to take a minute to give you the facts regarding the program. Below are the key points you need to know, and as always if you do have any further questions please reach out to us.

What is it?
Eligible homeowners are able to apply for a 5% or 10% shared equity mortgage with the Government of Canada.  A shared equity mortgage is where the government shares in the upside and downside of the property value. The Incentive enables first-time homebuyers to reduce their monthly mortgage payment without increasing their down payment. The Incentive is not interest bearing and does not require ongoing repayments.
Through the First-Time Home Buyer Incentive, the Government of Canada will offer:
• 5% for a first-time buyer’s purchase of a re-sale home
• 5% or 10% for a first-time buyer’s purchase of a new construction

It’s important to understand that with this program, the government will then OWN 5-10% of the equity of your home (pending on how much was contributed to the down payment).

Who is eligible?
First, you must be a First Time Home Buyer. This incentive is only offered to those who are purchasing their first home. Second, you need to have the minimum down payment to be eligible. The minimum down payment is 5% of the purchase price of the property, and this must come from your own resources. The Federal Government will not give you 5% to put towards/cover the entire down payment. Third, your maximum qualifying income is no more than $120,000. Lastly, your total borrowing is limited to 4 times the qualifying income.

There are restrictions on the type of property you can purchase. The below are the eligible properties:
o New construction (5-10% incentive)
o Re-sale home (5% incentive)
o New and resale mobile/manufactured homes (5% incentive)

Residential properties include single family homes, semi-detached homes, duplexes, triplex, fourplex, townhouses, condominium units. The property must be located in Canada and must be suitable and available for full-time, year-round occupancy.

How Does Repayment Work?

You can repay back the incentive in full at any time without a pre-payment penalty or you can repay the incentive after 25 years or if the property is sold, whichever happens first. The repayment of the incentive is based on the property’s fair market value:
o You are given a 5% incentive of the home’s purchase price of $200,000 or $10,000. If your home value increases to $300,000 your payback would be 5% of the current value or %15,000
o You are given a 10% incentive of the home’s purchase price of $200,000 or $20,000 and your home value decreases to $150,000, your payback amount would be 10% of the current value or $15,000.

If you are interested in this program or have further questions, we encourage you to reach out to your Dominion Lending Centres mortgage broker. This is a brand-new program and more details are coming out each day. We also are working to better understand the implications of this type of shared equity mortgage and will keep you updated on any news or updates we receive.

Written by Geoff Lee

Mortgages are complicated—we get it! But there are steps that you as a homebuyer can take to make the process a much smoother one (plus let you walk away with the sharpest rate!)

1. Use a Broker
This should be the first step you take when getting a mortgage! Enlisting a trusted broker to work with you can help you secure the sharpest rate and the right mortgage product too! This is one of the biggest (if not the biggest) purchase you will make in your lifetime. Working with a professional will make all the difference.

2. Budget, Budget, and Budget Some More
Budgets aren’t the most glamorous element of homebuying but they are a necessity. Why? Because often you will have overlooked costs that can make or break you getting into your home. A few things to consider:
• Property transfer taxes
• Legal fees
• Home inspection/appraisal fees
• Down payment (this is kind of a big one)
• Mortgage insurance
And the costs don’t stop once you own the home.

3. Understand the Importance of the Down-Payment
Many home-buyers focus on just simply putting money aside for the down payment. While this is crucial, there are other considerations.
• How big of a down payment can you make? You must meet the federally mandated minimum down payment: 5% for all mortgages up to $500,000, and 10% on any portion above $500,000 up to $999,999.99 (CMHC-insured mortgage loans are only available on properties valued under $1 million). But the size of the down payment will also reduce the interest you pay out over the life of your mortgage and reduce the size of the CMHC mortgage premium too.
• Take advantage of the Home Buyer’s Plan to withdraw up to $25,000 tax free from their Registered Retirement Savings Plan (RRSP). This can help to supplement your down payment as long as you understand the rules for paying it back.
• Leave plenty of time to transfer the funds from whichever source you are pulling them from. You will also need to leave adequate time for a certified or cashier’s cheque to be produced before the closing

4. Don’t Become Hyper Focused On the Rate
Yes, the rate is important, but don’t be hasty and jump into a mortgage purely based on the rate. Consider other areas such as the terms, the penalty to break, the amortization, and all other factors before signing on the dotted line. Your broker can help you to understand the ins and outs of a mortgage.

Considering these four things can help you be more prepared when beginning the mortgage process. Remember, a Dominion Lending Centres mortgage broker will help you and guide you through each of these things to ensure you are getting the best mortgage possible and with minimal stress too!

Written by Geoff Lee