Bank of Canada gives notice on rate hikes, no date

By Janet Guttsman and Ka Yan Ng
OTTAWA (Reuters) - The Bank of Canada laid the groundwork on Thursday to raise interest rates from current record lows, saying it was time to start withdrawing some of the stimulus that helped pull Canada out of recession.

Reinforcing a message it delivered earlier this week, the central bank said it was no longer promising to keep its key rate at 0.25 percent until the end of this quarter.

It forecast growth of 3.7 percent this year, and said core inflation, which strips out one-off factors, was set to stay close to its 2 percent target.

"With recent improvements in the economic outlook...it is appropriate to begin to lessen the degree of monetary stimulus," it said in a low-key Monetary Policy Report that paves the way for Canada to become the first big industrialized nation to raise rates since the recession started.

"The extent and timing of any additional withdrawal of monetary stimulus will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 percent inflation target," it added.
The report added details to a statement the bank made on Tuesday in which it left rates unchanged but made clear that higher rates were coming.

Before that statement few had forecast the bank would raise rates at its next rate-setting date on June 1. But a Reuters poll conducted on Tuesday showed 11 of Canada's 12 primary dealers now expect a June rate hike of 25 basis points.

Yields on overnight index swaps, which trade based on expectations for the Bank of Canada's key policy rate, edged lower after Thursday's report, showing the market saw rate hikes in 2010 as a touch less likely than it did before the report.

The Canadian dollar rose as high as C$0.9990 per U.S. dollar, or $1.0010, from C$1.0014 per U.S. dollar before the report.

At news conference, Bank of Canada Governor Mark Carney declined to be drawn on the timing of a rate hike. "Next question," he said tersely.


Thursday's central bank forecasts assume an average exchange rate of 99 U.S. cents per Canadian dollar, matching the average of the last month. But a strong dollar is one of a raft of factors that could upset the bank's forecasts, by slowing growth or making Canadian firms less competitive.

"There are still a fair number of key things that they are worried about," said Sheryl King, chief economist at Banc of America-Merrill Lynch.

"The immediate implications for the Canadian dollar are neutral to slightly negative right now because the market has gotten slightly excited and probably a little bit over-anticipatory about very aggressive rate increases, and I don't think these headlines validate that."

TURNING POINT
The central bank said risks to its forecasts were roughly balanced. Stronger growth could boost demand for Canadian exports and add to inflation, while a higher Canadian dollar and poor productivity could slow growth and dampen inflation.

It said global imbalances could "pose significant risks to the outlook" and insisted that advanced economies like the United States need to rein in deficits, while other countries must boost demand and allow exchange rate adjustments.

Carney, who will attend top level international talks in Washington this weekend, said talks about a global tax on banks to cover the costs of any future financial crisis are a "distraction" from core issues such as bank capitalization and liquidity.

The bank expects the private sector to become the sole driver of domestic demand in Canada by 2011, making this year a "turning point" as monetary and fiscal stimulus, which kick-started the recovery, are withdrawn.

Finance Minister Jim Flaherty, already in Washington for the Group of 20 talks, said he was "relatively comfortable" with the Bank of Canada's projections, saying they show Canada is emerging from the recession stronger than any other G7 country.

The central bank said the housing sector, marked by fierce bidding wars in Toronto and Vancouver, had exceeded its expectations, but that activity in the sector should weaken later this year.

(Additional reporting by David Ljunggren, Claire Sibonney, Jennifer Kwan, Euan Rocha and Louise Egan; editing by Peter Galloway)

New Mortgage Rules Take Effect

New mortgage rules take effect in Canada today. I outlined them in a prior post here:

http://ontariomortgageinfo.blogspot.com/2010/02/new-canadian-mortgage-rules-to-come.html

Please note the new Bank of Canada benchmark rate for qualifying variable rate mortgages and 1-4 year terms is currently 5.85%.

Please call or email me if you have any questions regarding the new rules.

Mortgage Renewal Shopping

While most Canadians spend a lot of time and expend a lot of effort in shopping for an initial mortgage, the same is generally not the case when looking at mortgage term renewals. Omitting proper consideration at the time of renewal costs Canadians thousands of extra dollars every year.

It’s important to never accept the first rate offer that your existing lender sends to you in the mail around renewal time. Without any negotiation, simply signing up for the market rate on a renewal will unnecessarily cost you a lot of extra money on your mortgage.

It would be my pleasure to have the lenders compete for your mortgage business at renewal time to ensure you receive the best mortgage options and rate catered to your specific needs. After all, just because a lender had the best available product or rate for you when you obtained a mortgage one, three or five years ago does not mean the same holds true in today’s market.

With products and rates changing on an ongoing basis, you can’t possibly know what the best offering is for your unique situation without having me – a mortgage professional – do some investigating on your behalf.

It’s my job to look at every rate and product change from each lender – including banks, trust companies and credit unions – every morning to ensure I find the best deals for my clients. I also have the inside scoop on specials available through dozens of lenders thanks to the large volume of business I fund through these lenders each year.

Often times, your existing lender will send a highball renewal rate to their existing clients in the hopes that you will simply sign the renewal form and send it back. Your best bet is to come to me prior to your renewal date or forward the lender’s renewal offer to me before signing anything. That way, you can rest assure you’re getting the best possible mortgage product and rate that suits both your current and future mortgage needs.

New CMHC rules for self-employed borrowers take effect today

The new CMHC rules for self-employed borrowers take effect tomorrow and pose new challenges for this category of client.

First off, self-employed borrowers with more than three years in the same business who apply for a mortgage using stated income, as well as commissioned-income borrowers, are now required to provide to provide traditional proof of income (or "third party validation") through documents like financial statements, contracts and T4s.

Those who have recently become self-employed and don't have third-party validation can still apply for a mortgage, but have to come up with a 10 per cent down payment instead of five per cent. Refinancing will also be cut to 85 per cent loan to value instead of the previous 90 per cent.

Brokers have been giving the rule changes mixed reviews. Mark Fidgett, owner of Verico Notapennydown.com said the latest move was "off the wall" and hopes that if enough people talk about their displeasure with the changes, the CMHC might alter its decision. "I don't think this was a good decision - it doesn't make sense now," he said, adding it also makes writing off income for tax purposes more difficult for BFS clients.

Dominion Lending Centres broker Stephen Gilmour, on the other hand, agrees with CMHC's decision.
"The more people who default on loans, the worse the market becomes," he said, noting he felt a lot of self-employed people have qualified for mortgages when they shouldn't have. "This provision for self-employed is going to put the right people in the right structure of home."

Read the comments on this article here: http://www.mortgagebrokernews.ca/news/43649/details.aspx

Canadian Mortgage Industry Headlines

From Dominion Lending Centres Weekly Bulletin - Industry News Highlights]

Mortgage Application

Mortgage fraud may not be the most serious crime in the grand scheme of things, but it’s not something the government should be helping. But that’s exactly what real estate professionals say is a likely result of the new mortgage rules being put into place on April 19th.

“There’s going to be a dramatic increase in mortgage fraud again,” says Don Campbell, President of the Real Estate Investment Network (REIN), a Calgary-based association of investors who collectively own more than $3 billion in property. “You watch this thing start to take off.”

The reason? It’s virtually impossible for investors to buy a third rental property without putting 20% down because the new CMHC rules use a 50% add-back policy instead of an 80% offset for rental income. Essentially, that means investors get less mileage from the rent that is typically used to pay off the mortgage.

The more difficult financing multiple properties beomes, the more tempting it is to cheat the system. One way to get around the rules is to not claim properties as investment vehicles.

“People are going to start signing documents and say, ‘Ah, yes, I’m moving in,’ or ‘This is my principal residence,’ just to get a mortgage that doesn’t require 20% down, but is 5% down,” says Campbell.

Click here to read more in the Financial Post.

Continued low interest rates and quickly rising home prices are helping encourage those who have been on the fence about buying their first home to go ahead and take the plunge.

But according to a TD Canada Trust poll of female homeowners, there are a number of things that they wish they’d known before they bought – for example, 25% said they’d wished they’d researched their mortgage options better.

“Whether you choose a variable-rate or a long-term fixed interest rate mortgage will depend on your comfort with interest rate fluctuation and your ability to carry a higher mortgage payment if interest rates rise,” says Chris Wisniewski, the bank’s group product manager for real estate secured lending.

“As anticipation about rising interest rates grows, more women may be interested in exploring longer-term fixed interest rate mortgages. Either way, it’s important to consider all options early because once you put in an offer, things will move very quickly.”

Click here to read the full story in The Province.

The honeymoon isn’t exactly over, but the partners – new home buyers and low mortgage rates – drifted apart a bit last week as seven major Canadian banks raised their posted rates.

The increases reflect a strong bond market, with the key five-year closed rate affected the most, rising 0.6% to 5.85%.

It means a homeowner taking the new rate will see monthly payments on a $250,000 mortgage rise to $1,577, up from $1,489 – an increase of $88 per month.

The rate increases come three weeks before new federal government regulations on minimum mortgage qualification requirements come into effect April 19th.

Click here to read the full Calgary Sun article.

According to the March RBC Canadian Consumer Outlook Index, most Canadians (65%) are losing sleep over their finances. More than one-in-four Canadians (27%) are up at night worrying about paying off their debt, followed by nearly one-in-five (18%) who worry about having enough for retirement and 16% who worry about having no emergency fund.

The survey also found that one-in-three (34%) were not confident about any aspect of their financial situation.

More Canadians believe the national economy will worsen over the next 12 months (20% in March compared to 13% in February). Similar to February’s findings, Canadians are still divided on the overall state of the economy, but the balance remains in positive territory with 54% of Canadians believing the economy is good and 46% describing it as bad.

Overall, the March RBC Canadian Consumer Outlook Index remained virtually flat at 108 points, down from 109 in February, suggesting Canadians see the overall economic recovery as a bumpy road ahead.

Click here to read more about the RBC index.